How Banks Are Replacing Treasuries, Utilities and CDs for Income Investors

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Many investors need income from their stocks to help supplement their life or retirement. With the yield on Treasuries so low, and with the Federal Reserve embarking on an interest rate cut cycle, many of these income-oriented investors are having to keep a focus on a specific group of stocks with steady and stable dividends. They may have purchased Treasury notes and bonds or bank certificates of deposit (CDs) in the past. The problem now is that CD yields are generally close to 2.5% (or less) the world of CDs just hasn’t really been as big of a draw compared to prior decades. And investing in Treasuries doesn’t even get a 2.0% yield out for five years, and the 10-year Treasury doesn’t generate a 2.10% yield. The 30-year Treasury now yields only about 2.6%.

Bank stocks have started to become the new income investor alternatives over Treasuries, CDs, utilities and other bond-like investments. Banks are cheap versus the market, and the big banks have begun returning massive amounts of capital to shareholders ($125 billion in buybacks alone). Most of the banks still have more upside to the Refinitiv analyst target price as well, while utilities have reached or even surpassed their consensus target prices.

It was back in 2012 that 24/7 Wall St. first showed how the utility stocks were becoming the replacement for CDs for income investors. In 2019, and even in 2018, banks have been replacing utilities as those replacements for CD investors. Now that all the major banks have been given non-objections for capital return plans by the Federal Reserve after its Comprehensive Capital Analysis and Review (CCAR) stress tests based on incredibly strong balance sheets, banks seem to be returning more capital than ever with massive dividends and stock buybacks. Many of the major and multiregional banks are still valued at between 10 and 12 times forward earnings, a handy discount to the stock market as a whole and a handy discount to the expected earnings multiples of most major utilities.

The Utilities Select Sector SPDR Fund (NYSEARCA: XLU) was trading at roughly $37 back in 2012, versus about $60 at the current time, but the exchange-traded fund looks to have paid out about $8.30 in dividends since that time. The difference between then and now, even considering the gains and payout hikes, is that it was possible to find yields from utilities stocks of closer to 5% back in 2012, and the Utilities Select Sector SPDR Fund dividend yield was closer to 3.9% at that same time. That fund’s yield is closer to 3.1% now, and the median dividend yield is about 3.1% of the 28 utilities screened in the S&P 500 Index, and the electric utilities within the S&P 500 are currently valued at about 19 times forward earnings, versus about 14 times back in 2012.

There is no free lunch when it comes to investing. Some of the top banks come with risks. Lower interest rates could squeeze margins lower, politicians love to rant about breaking up the big banks, and there are still calls for more intense scrutiny and regulations of the big banks. The test of time has proven that big and healthy banks have been able to overcome many of the challenges thrown at them over time. 24/7 Wall St. has laid out the case for each major bank stock and many of the well-known multiregional banking players. Companies that are more brokerage and investment banking rather than true bank outfits have been excluded.

Bank of America
> Yield: 2.3%
> Forward P/E: 11.0

Bank of America Corp. (NYSE: BAC) has committed to return a whopping $37 billion to shareholders through dividends and share repurchases from July 1, 2019, through June 30, 2020. The prior dividend of $0.15 per common shares is rising by 20% to $0.18 per share for an annualized payout of $0.72 per share. Bank of America’s common shares recently closed at $30.77, and Refinitiv has a consensus earnings per share target of $2.85 per share for 2019 and $3.06 per share for 2020. Its new dividend yield will be 2.34% when reflecting the hike.

With close to $30 billion targeting net buybacks, Bank of America may retire about 10% of its net outstanding shares, based on current prices. Its common shares were trading at $28.21 ahead of the CCAR results and traded up to $29.00 the day immediately after the stress test results were released. If it provides any comfort, note that Warren Buffett just added even more to his massive Bank of America stake.