Passive income is a great way to have money work for you. One of the best ways to generate passive income is by investing in companies that consistently pay dividends.
Dividend-paying companies tend to be higher-quality with more robust balance sheets, which is why they can deliver stellar long-term returns regardless of the market cycle. One industry with consistent dividend payers that could benefit from rising interest rates is the banking industry. Here are three such bank stocks that could be passive income all-stars.
1. United Bankshares: A 48-year track record of rising dividends
United Bankshares (UBSI 1.71%) provides banking services to customers across the mid-Atlantic region of the U.S., with branches in West Virginia, Virginia, Washington, D.C., Ohio, Pennsylvania, Maryland, and parts of the Carolinas.
The bank has masterfully expanded its business through acquisitions, acquiring 33 smaller regional banks since 1982. This growth-by-acquisition strategy has paid off for investors, who have seen their dividend payouts increase for 48 consecutive years.
United Bankshares also has done a solid job of controlling its expenses, as seen by its efficiency ratio. The efficiency ratio measures expenses (not including interest) divided by revenue, with a lower ratio signaling that a bank is operating efficiently. In the first quarter, the bank's efficiency ratio was 59%, below the industry average of 62%, according to S&P Global Intelligence.
The bank also stands to benefit from rising interest rates. That's because they traditionally make money on the difference between interest paid on deposits and interest earned on loans, called the net interest income (NII). The bank projected that NII could increase 8% to 10% in April -- before the Federal Reserve increased the federal funds rate by 75 basis points in June, the largest rate hike since 1994.
United Bankshares delivers investors a solid 4.2% dividend yield, and its steady history of increasing dividend payouts makes it an excellent bank stock for a lifetime of passive income.
2. Commerce Bancshares: Increased its dividend for 54 years straight
Commerce Bancshares (CBSH 1.52%) provides banking services across 152 branches in Colorado, Illinois, Kansas, Oklahoma, and Missouri. The regional bank has been in business for over 150 years and is the 38th-largest bank in the U.S. based on total assets.
Commerce Bancshares does an excellent job of managing risk and delivering industry-beating returns. One measure of risk in the banking industry is the Tier 1 common risk-based capital ratio, which tells you how well capitalized a bank is in case of a downturn in the economy. Commerce Bancshares' ratio is 13.9%, the third-highest among the top 50 largest banks based on asset size. With 68% of economists foreseeing a recession in 2023, Commerce Bancshares is in an excellent position to weather any potential economic storms on the horizon.
Return on average common equity is another measure banks use to show how efficiently banks generate profits and how likely a bank is to pay out dividends. Commerce Bancshares delivered investors a return on average common equity of 12.4% on average over the last 15 years, beating its peer average of 8.3%.
The bank currently yields investors 1.56% and has increased its dividend for 54 consecutive years, making it another excellent bank stock for a lifetime of passive income.
3. Bank OZK: Increased its dividend 48 quarters in a row
Bank OZK (OZK 2.45%) provides banking services across 240 offices in Arkansas, Georgia, Florida, North Carolina, Texas, California, New York, and Mississippi.
This bank is attractive because it relies heavily on net interest income and is particularly sensitive to rising interest rates. In the first quarter, the bank brought in a net interest income of nearly $250 million, an increase of 6.3% from the previous year.
According to its regulatory filing ending March 31, a 2% increase in interest rates would increase its NII by 7.3%, and a 3% increase in rates would cause NII to increase by nearly 12%. Keep in mind the Federal Reserve has raised the federal funds rate, its benchmark lending rate, by 1.5% since this filing and is projected to increase rates another 0.75% in its meeting at the end of this month.
Bank OZK delivers investors a solid 3.3% dividend yield and has increased its dividend for 48 quarters straight, making it another excellent stock to own for a steady stream of passive income.