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 Ally Financial Inc. (NYSE:ALLY) 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).
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Ally Financial Inc. (NYSE:ALLY)
Number of Hedge Fund Holders: 47
Dividend Yield as of August 4: 2.95%
Ally Financial Inc. (NYSE:ALLY) is a Michigan-based bank holding company that provides banking, investing, home loans, and auto finance services. The stock has gained 39% in the past 12 months, significantly benefitting from the rise in the banking sector. What sets the company apart from its peers is its all-digital approach, which means that it operates without a widespread network of physical branches. In an era where the internet, technology, and data are increasingly vital, this lack of physical presence could actually be an advantage, particularly in attracting new deposits. In the second quarter of 2024, the banking reported 3.2 million deposit customers, growing from 1.2 million in 2016, with 96% customer retention. The company also posted $13 billion of deposit balances held by investing customers.
While Ally Financial Inc. (NYSE:ALLY) is lauded for its business model, analysts are worried about its heavy dependence on the automotive industry. Originally, the bank focused on underwriting auto loans. When interest rates are low and the used car market is strong, the bank benefits greatly. However, if the automotive sector’s profitability declines, the company’s earnings could be negatively affected. That said, there are other factors to take into account when investing in this bank stock, with dividends being one of them.
Ally Financial Inc. (NYSE:ALLY), one of the best dividend stocks, has been making regular dividend payments to shareholders since 2016. The company currently offers a quarterly dividend of $0.30 per share and has a dividend yield of 2.95%, as recorded on August 4.
At the end of Q1 2024, 47 hedge funds tracked by Insider Monkey held stakes in Ally Financial Inc. (NYSE:ALLY), which remained unchanged from the previous quarter. These stakes have a total value of over $2.5 billion. With 29 million shares, Berkshire Hathaway was the company’s leading stakeholder in Q1.
Overall ALLY ranks 10th 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 ALLY 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 ALLY 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.
