We recently compiled a list of the 10 Best Bank Stocks with High Dividends. In this article, we are going to take a look at where Discover Financial Services (NYSE:DFS) stands against the other bank stocks with high dividends.

Bank stocks are having a moment. The S&P Banks Select Industry Index, which tracks the performance of companies belonging to different banking subsectors, surged by almost 17% in July, while the tech-focused Nasdaq fell by 1.6%. This shift is contributing to the broader market rally that has been ongoing for the past year or so. Share prices of major banks have reached all-time highs, allowing the finance sector to sometimes surpass the tech sector in driving the broader market higher on certain days. This spike in bank stocks came as a surprise to investors and analysts, considering that financial stocks have lagged behind the rest of the market for years. Just a year ago, the banking sector was in turmoil due to the collapse of Silicon Valley Bank, First Republic, and other major institutions. But as they say, the market moves in mysterious ways.

The current strength of banking stocks suggests that their recent surge is likely to be sustained rather than short-lived. Recently, the Federal Reserve Board conducted its annual stress test, a tool designed to verify that major banks can support the economy during economic downturns. The results indicated that, although large banks might face larger losses compared to last year’s test, they are well-prepared to withstand a severe recession and remain above the required capital thresholds. In addition, analysts are also presenting a positive outlook on the sector. One key reason for this bullish outlook is that recent earnings reports suggest banks are nearing the end of a slowdown in net interest income. Moreover, good news about inflation has led investors to shift their focus from tech stocks to companies, like banks, that could benefit from Federal Reserve rate cuts. Some of the largest banks, such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. have both reached all-time highs this year so far.

The enthusiasm for the sector is backed by evidence, as recent earnings reports from several banks reveal positive results for the second quarter of 2024. Morgan Stanley analyst Betsy Graseck believes that the shift in net interest income from a “headwind to a tailwind” will be a major factor driving positive operating leverage in the latter half of the year and into 2025.

Another reason for this strong outlook, according to Dave Donabedian, the Chief Investment Officer of CIBC’s private wealth division, is that “sticky money” is entering the sector for the first time in a long while. He attributed this trend to investors seeking diversification away from tech stocks and the attractive dividends offered by many bank stocks. The dividend factor is indeed accurate. Banking stocks have continued to offer generous dividends to shareholders. In fact, in 2023, the banking sector set records for dividend payouts and was responsible for half of the global dividend growth, thanks to the higher interest rates that allowed many banks to boost their profit margins. In this article, we will take a look at some of the best dividend stocks from the banking sector.

Our Methodology:

For this list, we scanned Insider Monkey’s database of 920 hedge funds as of Q1 2024 and identified bank stocks that pay dividends. From that list, we picked 10 stocks that have dividend yields above 2%, as of August 4. The stocks are ranked in ascending order of hedge funds’ sentiment towards them. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).

Discover Financial Services (NYSE:DFS)

Number of Hedge Fund Holders: 71

Dividend Yield as of August 4: 2.17%

Discover Financial Services (NYSE:DFS) is an American digital banking and payment services company that is also one of the largest card issuers in the US. Earlier this year, Capital One revealed its plan to acquire Discover in a $35.3 billion all-stock deal. Although the acquisition could affect consumers in the future, the deal is not expected to be finalized until later this year or early 2025. Currently, the companies are seeking approval from regulators and shareholders, and the deal is already drawing attention from policymakers across the political spectrum. DFS is up by nearly 15% since the start of 2024, outperforming the broader market that has delivered a 12.7% return this year so far.

Discover Financial Services (NYSE:DFS) reported strong operating performance in the second quarter of 2024, which is mainly shown by its loan growth, margin expansion, and higher non-interest revenue. The company’s total loans in the quarter amounted to over $127.6 billion, up from $118 billion in the same period last year. Its revenue for the quarter came in at $4.5 billion, showing a 17% growth from the prior-year period.

Discover Financial Services (NYSE:DFS) earnings were robust, yet analysts are focusing on the potential merger. Financial experts believe that the merger could be advantageous for both Discover and Capital One as it would increase the competition in the payment processing sector, which is currently dominated by Visa and MasterCard. This heightened competition could lead to better rewards and incentives for consumers, as issuers would need to offer more attractive credit card benefits to stand out.

On July 17, Discover Financial Services (NYSE:DFS) declared a quarterly dividend of $0.70 per share, which was in line with its previous dividend. The company has paid uninterrupted dividends to shareholders since 2007. As of August 4, the stock has a dividend yield of 2.17%.

Discover Financial Services (NYSE:DFS) remained popular among elite funds at the end of Q1 2024 as hedge fund positions in the company jumped to 71, from 43 in the preceding quarter, according to Insider Monkey’s database. The stakes held by these hedge funds have a collective value of over $3.5 billion.

Overall DFS ranks 6th on our list of the best bank stocks to buy. You can visit 10 Best Bank Stocks with High Dividends to see the other bank stocks that are on hedge funds’ radar. While we acknowledge the potential of DFS as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than DFS but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.

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Disclosure: None. This article is originally published at Insider Monkey.