By Lawrence C. Strauss
When it comes to financial stocks, banks command a lot of the attention from income investors.
But there are other options in that sector for those willing to look beyond regional banks or behemoths like JPMorgan Chase and Wells Fargo.
"It's not all about the banks," says Tom Huber, portfolio manager of the T. Rowe Price Dividend Growth fund. "There are some other companies out here with very good fundamentals, good outlooks, healthy dividends and dividend growth."
There are plenty of financial companies that specialize in insurance, asset management, brokerage, and other related businesses. While the yields of many nonbank financials don't always rival those of banks, which are often in the 3% to 4% neighborhood, some of these companies can offer less credit risk along with solid dividend growth.
"There are a lot of values out there," says Stephanie Link, chief investment strategist at Hightower Advisors. One stock she likes among nonbank financials is asset manager BlackRock.
Helmed by longtime Wall Street fixture Larry Fink, BlackRock had $10.5 trillion in assets under management at the end of March. The stock, which has returned minus 2% this year through the end of June, including dividends, has a dividend yield of 2.6% -- one of the higher yields among nonbank financials.
Link points out that BlackRock has made inroads into alternative assets, such as private credit and infrastructure investing, to supplement more traditional lines of business like actively managed mutual funds and exchange-traded funds.
The company, with a cash hoard of more than $9 billion at the end of March, earlier this year boosted its quarterly dividend by 2% to $5.10 a share, and it repurchased $375 million of its stock in the first quarter.
"These guys have the best profitability and the best franchise," says Link, adding that BlackRock is helped by strong distribution of its products as well.
T. Rowe's Huber says that he finds attractive dividend stocks in the insurance sector, which he sees as more defensive than other financial stocks.
"If there is a crisis and you're worried about credit, including commercial real estate, the banks are going to feel it first," he says. "Insurance tends to hold up better."
Their yields aren't always that enticing, but the dividends of several insurers he cites have been growing with the help of strong free cash flow.
Consider Chubb, whose businesses include property and casualty insurance and life insurance. The stock yields 1.4%, about in line with the S&P 500 index. It returned 14% in the first half of the year, including dividends. The company has steadily boosted its dividend, most recently to $3.64 a share annually, an increase of nearly 6%.
"The dividend is very safe, and it's a well-capitalized business," says Huber.
Another plus for the stock is that Berkshire Hathaway, led by Warren Buffett, had amassed a stake in Chubb worth more than $6 billion.
Huber also holds Hartford Financial Services Group, a property and casualty insurer that is also an asset manager. The stock, which returned 26% in this year's first half, yields a respectable 1.9%. The company last year raised its quarterly payout to 47 cents a share, up 10.5% from 42.5 cents.
Another stock to consider is Marsh & McLennan, whose specialties include insurance brokerage and risk management. "Technically it's a financial, but you're really not taking any credit risk," says Huber. "It tends to be very defensive."
The stock yields 1.3% and has returned 12% this year. The company last year declared a quarterly dividend of 71 cents a share, a 20% hike from 59 cents. That followed a 10% dividend boost in 2022.
Marsh & McLennan, says Huber, "has fair bit of recurring revenue and their business model is relatively predictable," all of which should help the company's dividend continue to grow.
Travelers, a property and casualty insurer, has been active in returning capital to shareholders, Hightower's Link says. The company recently raised its quarterly dividend by five cents a share to $1.05. The stock, which returned about 8% in the first half, yields 2.1%.
During its first-quarter earnings conference call with analysts in April, the company pointed out that it had nearly $6 billion remaining under prior board-approved share-repurchase authorizations. Travelers' market cap was recently around $47 billion.
Link says the stock's valuation is attractive. Based on FactSet data, it fetches a little less than 10 times the $20.88 it's expected to earn next year.
Another nonbank financial stock to consider is Charles Schwab, which yields 1.4%. The company's businesses include wealth management, securities brokerages, asset management, and custody services.
The stock returned 8% in this year's first half. The quarterly dividend has stayed at 25 cents a share since early last year, when it was raised by three cents or nearly 14%.
"You're not taking credit risk there," says Huber.
CME Group, which enables clients to trade derivatives such as futures and options, has a pretty unique approach to dividend investing. In addition to paying out a quarterly dividend, the Chicago-based company has been declaring a variable annual dividend at the end of the calendar year.
Last year, for example, it disbursed four quarterly payouts of $1 a share, followed by a variable dividend of $5.25 that was paid out in January. The company raised its quarterly disbursement earlier this year by 15% to $1.15 a share. FactSet lists the yield at 2.4%, but it's around double that if the variable payout is included.
The stock fell 6% in the first half, but that effective yield is a good shock absorber.
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July 05, 2024 21:30 ET (01:30 GMT)
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