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3 Reasons You Should Own Big Banks in Your Retirement Portfolio

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Have you banished big banks from your retirement portfolio? You might want to reconsider.

Image by PublicDomainPictures via Pixabay.

When asked why he robbed banks, Willie Sutton's response was priceless: "That's where the money is."

Luckily for investors, we don't have to rob a bank to make money from them. While the financial crisis of 2008 caused many investors to write off big banks as uninvestable, we think that's a mistake. So we asked our team of Fool contributors to explain why they think investors should add a few shares of banking stocks to their retirement portfolios today. 

George Budwell: Retirement is not the time to get creative or take risks with your portfolio. On the contrary, the best stocks to own at this juncture in your life are stable large caps that pay a dividend, and big banks often encompass these exact qualities.

JPMorgan Chase ( JPM 1.33% ) is a well-known big bank stock that offers a rock-solid dividend and at least some assurance that its share price isn't about to head south anytime soon. 

Unlike some of its peers that have yet to ramp up their dividends to pre-financial-crisis levels, JPMorgan's current quarterly payout of $0.44 a share exceeds its former payout of $0.38 a share around the time of the financial meltdown. The stock's 2.8% yield is also one of the highest in the financial sector, and one of the most secure, with a payout ratio of less than 30%, according to S&P Capital IQ.

This particular bank stock should be fairly well insulated from any major downturns in the market as well, given that it already looks "cheap" based on its underlying fundamentals. For example, JPMorgan's shares currently trade at a 12-month trailing price-to-earnings ratio of 11.1 and a forward ratio of 9.6 -- which are some of the lowest P/E ratios of all big banks. JPMorgan's shares are thus garnering little in the way of a premium at this moment.

In sum, big bank stocks are a good way to add sustainable income into your retirement portfolio without taking on undue amounts of risk -- and JPMorgan is perhaps top of the class among this cohort of stocks.

Todd Campbell: Commercial and industrial, or C&I, loan growth is critical to big banks because an absence in loan demand from businesses big and small can cause bank profitability to dry up. Fortunately, trends in data show that post-recession C&I loan demand continues to grow.

In fact, C&I loans held by all commercial banks in the U.S. are hitting record highs.  In August, C&I loans at U.S. banks totaled more than $1.9 trillion, up from $1.85 trillion in April and $1.72 trillion a year ago. That's miles higher than the $1.2 billion in C&I loans that were on the books exiting the Great Recession. 

The benefits from rising C&I loan activity are being felt across big banks. Last quarter, Bank of America ( BAC 1.09% ) noted that C&I loans grew by $11.4 billion between the first and second quarter, up 4%, and that C&I charge-offs are virtually non-existent.  Over at US Bancorp ( USB 1.21% ), commercial loans grew 11% year over year in the second quarter.

Demand for these loans should continue to benefit from steady, although admittedly tepid, U.S. GDP growth, and that is expected to lead to EPS growth at big banks. According to a New York Times survey of thought leaders conducted this past summer, GDP growth will be roughly 2.8% next year, which is  about in line with the 2.7% seasonally adjusted year-over-year growth we're seeing today. If those forecasts are correct, then steady C&I loan growth should continue to support profits at Bank of America, US Bancorp, and their peers in 2016. Currently, industry watchers believe EPS will grow to $1.59 next year at Bank of America, up from $1.42 this year, and that EPS will climb to $3.48 at US Bancorp next year, up from $3.20 this year. If these banks can deliver on those projections, then big banks could lift retirement accounts in the coming year.

Brian Feroldi: Banking and financial services in general are an enormously large part of the U.S. stock market, as the banking sector in general is responsible for more than 15% of the S&P 500 total market capitalization, making it the second largest component of the benchmark (behind only technology in terms of size). That put it well ahead of other sectors such as consumer staples, energy, and even almighty healthcare in terms of size, so when you consider that a handful of big banks dominate the industry, it's probably a smart idea to have a part of your retirement nest egg devoted to at least one of them.

Big banks also provide investors with some attractive qualities, as they tend to have diversified operations and a low cost source of funds that allows them to make profitable loans thanks to their millions of accounts. But which one to should you pick?

One option available to all of us who want to buy a big bank is to simply copy the one of the world's greatest investors, Warren Buffett, by putting some money to work in Wells Fargo ( WFC 2.58% ). Buffett has held this bank for years and likes it so much that he has made it Berkshire Hathaway's No. 1 holding, as it currently owns around $27.6 billion worth of Wells Fargo stock, which is more than 20% of Berkshire's total equity investments.

Buffett likes Wells Fargo so much because it has a long history of making smart loans and operating in a low-cost manner, which keeps charge-offs and its efficiency ratio near industry leading levels. Add those two factors together, and it's no wonder the bank consistently shows some of the best returns on capital in the industry. Better yet, investors who put some money in this name today paid a nice dividend yield of 2.8% that should continue to grow over time.

Even risk-averse investors should consider adding a high-quality big bank in their portfolio, and for those who want to do so, I think Wells Fargo is a great choice.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$162.29 (1.33%) $2.13
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$44.63 (1.09%) $0.48
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$50.07 (2.58%) $1.26
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$284.13 (0.98%) $2.75
U.S. Bancorp Stock Quote
U.S. Bancorp
USB
$57.57 (1.21%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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