Banks have been going on a dividend spree after sailing through the Federal Reserve's latest stress test. Investors hunting for the sweetest payouts may want to look past the marquee names to regional players that offer more generous yields.
Major banks rushed to announce increased dividends and buyback programs after acing the Fed's latest test of their financial health. JPMorgan Chase, Morgan Stanley, Citigroup and Goldman Sachs all announced divided increases, while JPMorgan Chase and Morgan Stanley also detailed new buyback initiatives.
Wall Street cheered the results. The State Street SPDR S&P Bank ETF rallied 1% on Thursday, while the broad market was up 0.3%.
Dividend hikes are always good news for income investors. While the big guys are getting the headlines, income-oriented investors may want to check out regional banks, which traditionally offer higher payouts and may get a bigger boost from good news coming from the Fed.
The reason: While the largest banks, including those deemed global systemically important, face Fed stress tests every year, smaller so-called Category IV banks, generally those with less than $250 billion in assets, only get examined every two years. That means when they are subjected to the test, it's a bigger deal to Wall Street -- and likely to the bank executives themselves who can deploy capital with increased confidence.
"The stress test results will sharply reduce capital requirements due to large decline in stress capital buffers ( SCB) for some Category IV regionals that had not participated in last year's stress test -- Citizens Financial, Fifth Third, and KeyCorp," noted J.P. Morgan Securities equity analyst Vivek Juneja in a note Thursday.
All three banks rallied Thursday, with Fifth Third up 2%, and Citizens and KeyCorp both up 1.6%. While none of these banks rushed out dividend hikes, regional banks like these consistently offer higher yields than national mega banks. While mega banks are capital hungry global financial supermarkets, many regional banks still focus on the more traditional business of taking deposits, making loans and returning cash to shareholders.
Among the five largest national banks by market capitalization, the highest-yielding option is Wells Fargo with a payout of 2.1%, according to FactSet. The others all yield less than 2%. By contrast, Fifth Third pays out 2.9%, Citizens 2.6% and KeyCorp 3.5%.
Other category IV banks that cleared the Fed's stress test include Huntington Bancshares and Regions Financial, both yielding 3.5%. Investors looking for an ETF targeting the sector can check out State Street SPDR S&P Regional Banking ETF (2.2% yield) or iShares U.S. Regional Banks ETF (2.6% yield.)
Of course, regional banks have risks. Because they are less diversified than mega banks, their share prices tend to be more closely tied to the ups and downs of the economy -- a downside for investors seeking dividends as a way to play defense. Banking stocks also rallied this spring on hopes that new Federal Reserve Chairman Kevin Warsh would prove more dovish than his predecessor Jerome Powell. Lower short-term interest rates tend to boost profits of banks, which borrow short and lend long. Hopes for lower short-term rates have faded recently, due to to persistent inflation and a strong labor market.
Still, Wall Street expects the banking sector to remain solidly profitable in 2026 -- with profits forecast to be up about 16% on average, according to FactSet. That is thanks to the still-strong economy, lighter regulation and lower capital requirements tied to the recent stress tests. Profit forecasts for the regional sub sector are slightly better still, at around 18%.
Write to Ian Salisbury at ian.salisbury@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
June 25, 2026 15:32 ET (19:32 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments