Over the long term, the best place for investors to park their money is stocks. With thousands of options to choose from -- not forgetting all the investment funds and ETFs at your disposal -- it can be difficult to figure out what stocks are best for your portfolio. One tried-and-true investing strategy is to find stocks with strong dividend growth. This means buying companies that pay you a bigger dividend every year.
A popular dividend grower is JPMorgan Chase (JPM -0.11%). The largest U.S. bank has raised its dividend 166% during the past 10 years as it continues to be a stalwart of the global financial world. I would expect the company to provide steady returns for investors for decades to come. But I don't think it is the best dividend bank stock for investors today.
Ally Financial (ALLY -0.36%) has a higher yield and faster dividend growth, so income investors should pass on JPMorgan and buy this stock instead.
Efficient consumer banking
Previously the financial arm of the automotive giant General Motors, Ally Financial was born out of the financial crisis of 2008. As its own financial entity, Ally has remained in the automotive financing business. Last year, it originated $40 billion in automotive loans, making it one of the largest car lenders in the country.
What's changed about Ally's business is how it finances these automotive loans. During the past 10-plus years, Ally has built up an online consumer bank with no physical branches in order to save costs, offer higher yields to customers, and target younger consumers. At the end of 2023, it had $155 billion in total deposits on its balance sheet, which it uses to finance the loans it makes as a bank.
Ally's stock endured a 50% decline two years ago after the Federal Reserve started aggressively raising interest rates to tame inflation. Rapidly rising interest rates forced the company to pay more to its depositors, which increased its financing costs. To counteract these interest rate increases, the company has begun charging higher interest on its automotive loans.
The problem is, Ally's existing loan portfolio doesn't benefit right away from higher interest rates, and it takes many years for these assets to turn over and be replaced by higher-yield loans. This is why Ally's net interest margin (NIM) -- the spread between its interest costs and interest income -- has narrowed. In 2023, Ally's NIM was 3.3% versus 3.85% in 2022.
The worst seems to be over, though, with management expecting to exit 2024 at a 3.4% NIM or higher and then eventually recover to 4% or higher in the coming years. I think this makes sense as the Fed has paused its interest rate hikes and may lower them again sometime this year.
ALLY Dividend Per Share (TTM) data by YCharts
Fast-growing dividend, high yield
With the interest rate headwinds normalizing, investors have started to bid up shares of Ally. The stock is up 10% year to date and 55% in the past six months. The stock still looks cheap, with a trailing dividend yield of 3%. This is higher than what you can get at JP Morgan, which currently has a 2% dividend yield.
Even better, this is at a time when Ally decided to pause increases to its dividend, due to the interest rate hiking cycle. Even with this headwind, Ally's dividend has increased 275% since the company began paying a dividend in 2016. Over that same time, JP Morgan's dividend has only grown by 109%. So Ally has a higher dividend yield and a better track record of raising its dividend. That sounds like a great recipe for strong stock performance to me.
Over the long term, I believe Ally can remain a leader in automotive lending and expand its consumer banking business, leading to earnings growth. In turn, this should lead to dividend increases. Any shareholder who buys today and holds for the long term will likely see a steady stream of income into their portfolio year in and year out.
