Markets have been volatile ever since the beginning of the global pandemic in March 2020. Stocks have gone on wild upward and downward rides, which can increase your stress as an investor. Today, stocks in the U.S. are closing in on all-time highs, signaling that we may be entering a new bull market. However, that does not mean you should go all in chasing the growth stocks that have soared 100% this year. Students of financial history know the market is bipolar and changes its mood on a dime.
One way to dampen the effects of volatility in your portfolio is to buy stocks with high dividend yields that give you a steady income stream. Ally Financial (ALLY 0.41%) has an attractive dividend yield of close to 4% and a history of raising its payout to shareholders. Let's see if this is a safe bet for investors looking for dividend stocks in the 2023 market rally.
Rising interest rates, falling car prices
Ally has a peculiar history. It used to be the financial arm of General Motors, but was spun out after the division took on bad mortgage loans during the financial crisis in 2008. As a separate business, Ally Financial still focuses on automotive lending but has added a second pillar to its operations: consumer banking. At the end of the last quarter, Ally had $140 billion in retail deposits, which it uses to fund car loans.
Smaller banks have had to significantly raise the interest rates they pay depositors due to the Federal Reserve rapidly hiking the benchmark federal funds rate to fight inflation. Ally is currently offering 4.25% interest on its savings accounts. The company has raised the interest rates on its car loans to mitigate this pressure, but there are still low-yielding loans sitting on its balance sheet from the last few years that won't get paid back for a year or two. This has narrowed the spread Ally earns from its banking operations, known as net interest margin (NIM).
On top of interest rate pressure, Ally is facing headwinds from falling used car prices, which decreases the recovery value the company can retain from delinquent loans. Used car prices have been falling since the end of 2021, which has inflicted pain on Ally's lending operations.
Despite these difficulties, Ally is still generating a profit. Over the past 12 months, it has posted net income of $1.2 billion. While this is off from a high of more than $2.5 billion two years ago, it shows that Ally has a resilient business model. Interest rate pressure is starting to subside with the Fed pausing interest rate increases for the time being, and the company will eventually replace the low-yielding loans on its balance sheet with a new set with higher yields. This indicates to me that Ally can widen its NIM -- and therefore net income -- in 2024 and 2025.
A long track record of growth
Over the longer term, Ally investors should have confidence its growth engine will continue. It has added retail banking customers for 58 straight quarters, which is the lifeblood of the banking business. More deposits mean more capacity for making automotive loans, all else equal. Ally has a fantastic track record of persuading people to use it for their consumer banking needs.
Today, Ally has more than 3 million deposit customers. With its online-only model that gives it lower overhead costs than traditional banks, Ally can offer higher interest rates for depositors. This has been the key reason for its consistent growth during the past decade. I see no reason this can't continue during the next decade.
Data source: YCharts
The stock has a good dividend, but keep an eye on management
Despite these competitive advantages, Ally stock has been beaten down in the last two years, likely due to concerns about rising interest rates and falling car prices. Its dividend yield is currently 4%, which is more than double the S&P 500's yield of 1.5%. The company has consistently raised its dividend, which has increased more than 100% in the past five years. From my seat, this makes the stock a great income play at current prices.
The one long-term concern for Ally is the number of executives that have left the company in recent years. Its chief executive officer, chief financial officer, and head of consumer and commercial banking have all departed in the past five quarters. While not the end of the world, changing executives can bring instability and a shift in strategy, which may lead to negative outcomes for the business. This is something investors should keep a close eye on in the years to come.
On the whole, Ally looks like a good stock to own for the long haul. The shares are cheap and the company has a banking operation set to keep growing. Buy this dividend grower and watch the income pile up in your account quarter after quarter.
