Dividend investors don't have an abundance of great options when it comes to bank stocks. Many banks still pay very low dividends as a result of the financial crisis, and others are simply too risky to hold in a portfolio that you depend on for income.
However, there are some banks that are indeed excellent options for dividend-seekers, and can provide you with excellent income as well as growth for decades to come. With that in mind, here are three banks that could make great additions to your portfolio.
1. For rock-solid banking, look to the north
Toronto-Dominion (TD) Bank (NYSE:TD) was named Money Magazine's "best big bank" of 2014, and for good reason. Unlike many other banks, which are trying to downsize and cut costs wherever they can, Canadian-based TD Bank has expanded its U.S. presence over the past several years and has focused on what it does best -- provide the best possible customer experience.
Known as "America's Most Convenient Bank," TD's branches are open late at night and on the weekends (even Sundays) in many locations, which makes it a great choice for people who aren't able to do all of their banking online or in person during "bankers' hours."
TD has tripled its assets over the past decade, through a combination of organic growth as well as some very successful acquisitions, such as New Jersey-based Commerce Bank, which is where the "most convenient bank" philosophy originated.
TD currently pays a handsome 3.6% dividend yield, which represents less than half of the bank's 2014 earnings. Speaking of earnings, TD's have grown steadily and predictably over the years, and are expected to do so for the next few years as well. So the dividend should not only be safe, but should continue to grow, as it has done consistently for years.
2. Great risk management and impressive growth
At first glance, U.S. Bank (NYSE:USB) might seem expensive, since it trades at a higher valuation that any other large U.S.-based bank. However, there is a good reason people are willing to pay a little more for U.S. Bank shares.
U.S. Bank is one of the best-run, profitable banks in the industry, and has been for decades. As of the most recent quarter, U.S. Bank produced a return on equity of 14.7%, a return on assets of 1.54%, and operated at an efficiency ratio of 53.2% (lower is better). For comparison, JPMorgan Chase operated at an efficiency ratio of 61%, and produced ROE and ROA of 9% and 0.78%, respectively.
In addition to the excellent performance, U.S. Bank continues to grow at an impressive rate. For the fourth quarter of 2014, deposits grew by 7.2% and loans grew by 5.9% on a year-over-year basis. In fact, the bank's 16% earnings growth that's projected by 2016 is the fastest rate of the three banks featured here. And while U.S. Bank's 2.2% dividend yield doesn't exactly make it a "high income" stock, the very conservative 32% payout ratio combined with the projected earnings growth means there is plenty of room for the dividend to head higher in coming years.
3. This bank's "wide moat" makes it a great long-term play
There are a few characteristics that qualify a stock as a "forever" investment. For starters, it needs to have a simple, easy-to-understand business model, and it has to be a business that will always be in demand. It also needs to have a "wide moat," or a distinct competitive advantage over its peers. One bank that definitely qualifies here is Wells Fargo (NYSE:WFC).
Wells Fargo is the largest bank in the U.S. in terms of market cap, but its business looks very different from the rest of the "big four" (Citigroup, Bank of America, and JPMorgan Chase). Instead of relying heavily on things like trading and investment banking, the majority of Wells Fargo's business consists of community banking. In other words, Wells Fargo makes most of its money simply by loaning money (through mortgages, auto loans, credit cards, etc.) and other relatively straightforward and low-risk operations like insurance and retail brokerage.
Wells Fargo's "wide moat" is its size, which allows it to operate more efficiently while offering its customers a wide variety of financial products. In fact, Wells Fargo is known for being the best in the industry at cross-selling products to customers, with the average Wells Fargo customer using at least six of the bank's products. This gives the bank not only scale, but also additional streams of revenue.
As far as the dividend is concerned, Wells Fargo's current 2.5% annual yield represents just 34% of the bank's earnings in 2014. That means there's plenty of room for the dividend to increase, especially since analysts expect the bank's profits to improve by 11% by 2016.
So, which to choose?
This is by no means an exhaustive list, and these are three great options for any dividend portfolio, so you really can't go wrong with any of these three. I prefer TD Bank right now, since its share price has pulled back considerably in recent months, but all three should serve you well for decades to come.
Matthew Frankel owns shares of Bank of America and The Toronto-Dominion Bank (USA). The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc, JPMorgan Chase, and Wells Fargo and has the following options: short April 2015 $57 calls on Wells Fargo and short April 2015 $52 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.