The bear market left a lot of investors looking for a safe place to park some of their portfolio cash. For many, that led them to invest in dividend stocks, which provide income or cash that can be reinvested in the stock to boost total return. In a market where growth-stock-focused indexes like the Nasdaq Composite are down nearly 25% in 2022 and the S&P 500 is down 16.4%, any extra income or return is appreciated.
The market will eventually bounce back, but with valuations still high among growth stocks, it's not clear yet whether the market has bottomed. If you want to add some balance to your portfolio to offset some of the losses with a stock that produces solid dividends, consider Regions Financial (RF -1.34%).
Why Regions Financial is beating the market
Regions Financial, based in Birmingham, Alabama, is the holding company for Regions Bank, which serves customers in 16 states in the South and Midwest. As of June 30, it is the 25th largest bank in the U.S., with $160 billion in assets under management.
Banks can be a safe haven of sorts for investors during a bear market, as they typically pay solid dividends. They also tend to fare better than most industries in a high-rate environment. The banks that perform best are those that focus on basic banking functions like loans and deposits. It's the larger banks that also rely heavily on investment banking, institutional trading, asset management, and other activities that tend to take a hit in bear markets. While the larger diversified banks often outperform is good economies, the smaller banks tend to outperform in bear markets, especially those where interest rates are rising.
That has certainly been the case for Regions Bank, which generated about 65% of its $1.75 billion in revenue in the second quarter in interest income. JPMorgan Chase, the largest U.S. bank, made about 49.5% of its revenue from interest income in the second quarter.
Regions generated $1.75 billion in revenue in the second quarter, up 10.5% year over year, driven by a 15.1% increase in net interest income. Further, revenue was up 9.3% over the first quarter, as net interest income was up 9.2% over the previous quarter.
The higher interest income came from a spike in the prime interest rate, which went up from 0% to 0.25% at the start of the year to the current level of 2.25% to 2.50%. It is likely to rise another 75 basis points in September and should keep going up into next year as the Federal Reserve Board tries to get inflation back down to historical ranges.
A robust dividend and a 12.3% one-year return
What helped Regions boost revenue this year is not just higher interest rates. Loan activity remains robust, as total loans were up 7.3% year over year in the second quarter and 3.4% over the first quarter. An economic slowdown could dent loan growth over the next couple of quarters, but that loss will be offset by higher interest income from rising rates.
So, in a market where the S&P 500 is down 16.4% year to date, the KBW Bank Index is down 18.1%, and the Nasdaq is down 24.7%, Regions is up 0.4% year to date and 12.3% over the past year as of Sept. 13.
In addition, Regions' dividend has increased annually for the past 10 straight years. This quarter, Regions increased its dividend by 17% to $0.20 per share and it now generates a yield of 3.58%, which is better than the bank industry average of 3.18%. Regions generates enough free cash flow to set the payout ratio at a low and very manageable 22.73%, which means plenty of earnings power to continue to increase the dividend in the future.
The stock valuation is cheap at the moment, with a forward price-to-earnings ratio of 9.1. Given the uncertainty ahead, Regions looks like a good buy for investors looking for dividend income and solid returns in a rising rate environment.
