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 Bank of America Corporation (NYSE:BAC) 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).
A professional banker providing consultation to a customer in the security of his office.
Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 82
Dividend Yield as of August 4: 2.77%
Bank of America Corporation (NYSE:BAC) is an American multinational financial services and investment banking company. In a notable recent development, Berkshire Hathaway‘s top investors have sold Bank of America shares for 12 straight trading days, from July 17 to August 1. In total, they sold 90,422,124 shares, raising approximately $3.82 billion. According to analysts, the selling of BofA shares could be attributed to the bank’s sensitivity to interest rates. While BofA previously benefited significantly from rising rates, the anticipated start of a rate-cutting cycle in September might result in a faster decline in its net interest income compared to its competitors. For years, the company has been the second-largest investment in Berkshire Hathaway’s portfolio, trailing only tech giant Apple. BAC is up by over 8% year-to-date.
ClearBridge Investments highlighted the interest rate pressures on Bank of America Corporation (NYSE:BAC) in its q1 2024 investor letter. Here is what the firm has to say:
“We added several new positions during the quarter. Our largest new addition was Bank of America Corporation (NYSE:BAC), one of the world’s leading financial institutions, serving some 66 million consumer and small business clients across the U.S. as well as large corporations, financial institutions and governments globally. We believe that the interest rate pressure that Bank of America faced in early 2023 has subsided, and risks surrounding deposit outflows have abated, which should allow the company to improve its book value and capital growth as well as benefit from a rebound of capital markets activity.”
Bank of America Corporation (NYSE:BAC) is a strong dividend payer. The company has never missed a dividend in the past 26 years. In July, it announced an 8% increase in its quarterly dividend to $0.26 per share. During the second quarter of 2024, the company returned nearly $2 billion to shareholders through dividends, which makes BAC one of the best dividend stocks in the banking sector. As of August 4, the stock has a dividend yield of 2.77%.
According to Insider Monkey’s database of Q1 2024, 82 hedge funds owned stakes in Bank of America Corporation (NYSE:BAC), down from 96 in the preceding quarter. The total value of these stakes is more than $45.5 billion.
Overall BAC ranks 3rd 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 BAC 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 BAC 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.
