Bank of America (BAC 1.00%) is one of the best-known banks in the world and, thanks to a nearly 20% stock decline over the past three months, the 3.1% dividend yield appears relatively attractive. But if you are looking for a reliable dividend stock in the finance sector, I'd suggest a pivot to real estate investment trust (REIT) Federal Realty (FRT -2.76%). Here's why.
1. A higher yield
From a top-level perspective, the 3.1% dividend yield from Bank of America pales in comparison to the 4.4% yield you can get from Federal Realty. To be fair, the two entities have vastly different corporate structures. Bank dividends are treated like any other industrial dividend payment, with earnings taxed at the corporate level and then again when they are paid out as taxable dividends to investors.
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REITs were specifically created to pass income on to investors in a tax-advantaged manner. As long as the landlord pays out 90% of its taxable income as dividends, it avoids corporate-level taxation. The trade-off is that dividends are typically taxed as regular income at the shareholder level.
But there's a work-around for this if you own the REIT in a Roth IRA. With these accounts, you pay tax on the money going in, but any money you take out is tax-free. So if you put Federal Realty in a Roth, you can create a (more or less) totally tax-free income stream.
2. A better dividend history
Not only is Federal Realty's yield higher, but it is also a Dividend King. That means it has increased its dividend annually for over 50 consecutive years, which puts it among a rarefied group of companies.
Bank of America's dividend has grown each year for a decade, but it was forced to cut it during the Great Recession. That was a very tough period for banks, but it's not like today is a walk in the park given the pressures being caused by fast-rising interest rates.
There have already been two recent bank failures. While Bank of America probably isn't at risk of failing, investors have sold off the stock along with the rest of the banking sector.
3. A less complex business
On the surface, Bank of America seems like a simple business, but it really isn't. Yes, it operates the banks you see in your community, but it also has businesses in international banking, wealth management, and capital markets. It is actually a lot more complex than it looks.
Federal Realty owns strip malls and mixed-use assets that it leases out to others. It does some construction: largely redevelopment of existing assets and ground-up development in the mixed-use arena. But the core of the company is pretty basic: Own great properties in great locations. Simple is often better when it comes to investing.
4. A better growth opportunity
Bank of America is a Goliath, and given the highly developed state of the industries it serves, it is fighting for share in a very competitive landscape. It is a capable company, but finding material growth will be a hard-won process.
Federal Realty has a long tradition of buying properties that need some love, investing in those assets to increase their value, and then selling them if the REIT can get a good price. It then repeats the process. This is something that it should be able to do for a long time (given the entropy inherent in physical property) without any material trouble given its size and capabilities.
That said, right now is a tough time for banks. That's partly because of the immediate impact that rising rates have had on bank balance sheets, but also because of the risk that rate hikes trigger a recession. In economic downturns, bank results get hit by defaults and reduced demand for their services. Most banks wind up hunkering down in survival mode.
Federal Realty, which primarily owns retail properties, would be hurt by a recession, too. However, during the pandemic, it used the economic dislocation to buy a handful of assets, including pushing into a new market (Arizona). Those properties all offer redevelopment opportunities, so even if the economy hits the skids, the REIT will still be putting money to work to improve its long-term business prospects.
Notably, it has exposure to regions that are population-dense and very wealthy (well above average for its peer set), which means that even a recession shouldn't be too big a drag on its performance. It takes a sharpshooter approach (with a portfolio of just 100 or so assets), focusing on owning properties that retailers want to be in, good economy or bad.
Go with safety first
Bank of America is not a bad bank, and there's no reason to suspect that the runs on banks that the industry has faced will be an issue for it. But even after a notable stock price decline, the yield still lags behind what you'd get from Federal Realty.
And while Federal Realty is likely to be just a slow dividend grower over time, given the economy and current banking upheaval, it seems like a better option than Bank of America in the increasingly risky financial sector.
