Charles Schwab (SCHW 0.13%) is an iconic name in the financial sector, given that the company basically helped to usher in the discount broker business model. The stock price plunged roughly 33% so far in 2023. Schwab stock got punished along with those of regional banks after two banks suffered high-profile bank runs.
Contrarian investors could easily see this as a buying opportunity. But dividend investors like me will probably be better off putting our investment dollars with a different finance icon.
Thank you, Mr. Market
Something I look for in a potential investment is a great company whose stock is trading down over what appears likely to be temporary issues. One way to determine that is by looking at the attractive stock's relative dividend yield. Basically, if a yield is historically high I want to do some further digging. Charles Schwab's dividend yield is currently at the high end of its historical yield range.
SCHW Dividend Yield data by YCharts
Why? Largely because investors are worried that customers will pull their cash from the company, as they have done with regional banks like First Republic, SVB Financial, and Signature Bank. There are very real reasons to be worried, as a swift draw on cash could force Charles Schwab, which offers banking services, to sell long-term investments that it is holding on its balance sheet at face value. Carrying bonds at face value is allowed, but given the rise in interest rates (bond prices and interest rates move in opposite directions), selling them could lead to the need to take losses on those assets.
With regard to Charles Schwab, the fear is probably out of proportion to the risk. One of the biggest reasons for optimism is that the broker's business is fairly well diversified, unlike the banks that have gone under. This really does appear to be a case of Wall Street overreacting. The big problem I have with Charles Schwab is more mundane. Even after a huge stock price decline, the yield is still just 1.8%. Fellow finance icon T. Rowe Price (TROW 4.77%) has a historically high 4.3% yield.
SCHW Dividend Yield data by YCharts
Used to the ups and downs
T. Rowe Price isn't a broker; it is an asset manager that collects fees for investing money on behalf of others. Every bit as iconic as Schwab, the company's stock has been in the doghouse since the broader market started to turn lower. At this point, the share prices are down 50% from their 2021 peak, which is why the yield is so high today.
The big story is that T. Rowe Price's business is driven by its assets under management (AUM), or the money it invests on behalf of others. That figure drives the top and bottom lines because of the fee-based nature of the business. More AUM leads to more income, less AUM leads to less income. In 2022 alone, T. Rowe Price's AUM fell roughly 25%, leading to a 37% decline in earnings. That's not good, but this is just par for the course for an asset manager. Bear markets follow bull markets and bull markets follow bear markets.
This is where a look at T. Rowe Price's dividend history comes into play. It has increased its dividend annually for 37 consecutive years. There have been many bull and bear markets over that span, including a couple of real doozies like the downturns that accompanied the 2000 dot.com crash and the Great Recession. Clearly, this asset manager has a good handle on how to survive industry rough patches while still rewarding investors with dividend growth. Notably, it increased its dividend in the first quarter of 2023, well aware of the headwinds it is facing today.
But the big reason to be so confident here is really found on T. Rowe Price's balance sheet. The company has no long-term debt, which is basically as pristine as a balance sheet can be. Thus, it has plenty of financial leeway as it awaits a market upturn. When that eventually comes to pass, T. Rowe Price's AUM will increase as the portfolios it manages also increase in value and investors return to the market. Which is exactly what has happened following previous downturns.
Pick your yield
As noted, the current drawdown in Charles Schwab is probably an opportunity for investors that think in decades and not days. But if the still-modest yield just isn't enough to attract you to the stock, you might be interested in T. Rowe Price and its historically high 4.3% yield. Sure, you could probably find a CD that yields that much, but you'll be giving up the opportunity for long-term dividend growth. And, like before, the problems T. Rowe Price is facing today are highly likely to be just as temporary as previous bear markets have proven to be.
