To dividend investors, yield is often the first thing that’s looked at when searching for a suitable stock to buy (in addition to this piggybacking strategy, which is pretty good too). While it is important to understand how much return a company’s dividend payments can generate on a yearly basis, it’s an incomplete way to perform this analysis. By selecting higher yield stocks that pay a small percentage of their earnings out as dividends—a metric commonly termed “payout ratio”—we can find names that have the possibility of dividend growth in the future.
Over the past five years, the financial services sector has had the lowest aggregate return in the entire universe of global equities and year-to-date, it’s sixth of eleventh in terms of total return. With this in mediocrity in mind, it’s even more important for anyone hunting for income in this space to find stocks that may boost their payouts going forward. Let’s take a look at four lesser-known names we found with dividend yields above 3%.
Sumitomo Mitsui Financial
Of all the large-cap stocks in the financial sector (+$10B market cap) with dividend yields of at least 3%, Sumitomo Mitsui Financial Grp, Inc.(ADR) (NYSE:SMFG) pays the lowest percentage of its earnings out as dividends. Over the past twelve months, the Japanese financial services company sports a payout ratio of less than 20% and a dividend yield near 5.3%. In April, Sumitomo upped its full-year dividend forecast to ¥70 per share from ¥50 per share, with half of the increase attributable to a special dividend given out for the company’s 10th anniversary.
Despite the fact that the bank’s bottom line has was estimated to shrink by over 25% yoy earlier this year, shares of Sumitomo have risen by 36% year-to-date as earnings have largely beaten analysts’ consensus. As Bloomberg so ardently states, this negative growth has occurred as Japan’s “monetary easing makes loans less profitable even as borrowing picks up amid an economic recovery [in the country].”
With a forward price-to-earnings below 11 and a price-to-book multiple near parity, however, it appears that investors aren’t fully appreciating the profits this foreign bank is generating. The dividend growth, high yield and moderate payout ratio are additional pluses, and the presence of a value investor like David Dreman and a quant guru like Jim Simons further to notion that there are multiple reasons to be bullish on Sumitomo Mitsui.
Banco Bilbao Vizcaya Argentaria
Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA), meanwhile, is another international financial large-cap with an exceptionally solid dividend yield and a reasonable payout ratio. Banco Bilbao currently offers a yield of 3.5% and has paid dividends in every quarter since the beginning of 1997, and it pays around 41% of its EPS out as income to investors.
The company is based in Spain and has additional operations in Portugal, Mexico, South America, Puerto Rico and the U.S., and Wall Street expects earnings to grow by 7% a year over the next five years. Like Sumitomo Mitsui, Banco Bilbao trades very cheaply at 10.6 times forward EPS and its diversified international exposure actually endears it to us a bit more. David Dreman also holds a small position here (see the value investor’s full equity portfolio), and Two Sigma Advisors and Peak6 Capital were buying in the last round of 13F filings. On the whole, this is another financial play that offers a bit over everything: value, income and growth.
Banco Bradesco SA (ADR) (NYSE:BBD), additionally, continues the string of financial stocks that offer good yield with the potential for a dividend boost that happen to be based overseas. Banco Bradesco, which is located in Brazil, is the second largest private bank in the country. While it may be most widely known for its introduction of ATM biometric authentication systems to the Brazilian market, Banco Bradesco is no slouch in the growth department.
The bank has grown its revenues by 17% a year over the past half-decade, and earnings have expanded by 7.5% a year over this time. On the whole, sell-side analysts expect annual earnings growth to accelerate to almost 10% over the next five years, and shares are actually cheaper than Banco Bilbao and Sumitomo at less than 10 times forward EPS. Although a finance-focused investor seeking true international exposure might be best looking elsewhere, Banco Bradesco’s 4% dividend yield at a payout ratio near 33% make it one of the best dividend stocks in this space.
Royal Bank of Canada
Royal Bank of Canada (USA) (NYSE:RY) is another large-cap financial stock that offers one of the sector’s lowest payout ratios (46%) with a dividend yield of 3.9%. This particular bank has nearly doubled its quarterly dividend since 2006, and it has paid shareholders in 16 consecutive quarters.
This streak isn’t as long as that of the aforementioned Banco Bilbao, for example, but Royal Bank of Canada is almost equally as cheap at 11 times forward EPS and a paltry price-to-cash multiple of 0.3. It’s possible that this bank offers the best bottom line growth prospects of all four banks discussed here due to its exceptionally strong personal/commercial banking and wealth management businesses, in addition to Royal Bank of Canada’s ability to maintain high quality loan credit notwithstanding a national housing market that “teeters on the brink,” according to some experts. We’ll continue to watch this stock very closely, in addition to its three international peers discussed above.