When it comes to dividends, real estate stocks' high yields look awfully tempting -- but bank stocks, which boast extras like share buybacks and dividend hikes, may be a better bet right now.
Both banks and real estate investment trusts are sensitive to interest-rate moves, and both hit a rough patch after the Federal Reserve started raising rates in 2022. Both sectors also offer market-beating yields -- real estate stocks at 3.1% and banks at 1.9%. (The S&P 500 index yields a paltry 1%.) But while real estate is still in the midst of a halting recovery, bank shares have come roaring back, with the sector-tracking Invesco KBW Bank exchange-traded fund returning more than 30% in the past year.
One key reason: While REITs are still struggling with comparatively high interest rates, banks have been able to profit from the steepening yield curve -- the gap between shorter and longer rates. While REITs typically borrow money, banks are short-term borrowers and long-term lenders.
The difference shows up in the sectors' second-quarter earnings. Wall Street analysts forecast financial profits to grow nearly 18%, compared with less than 6% for real estate stocks, according to FactSet. Of course, there are other factors, too. Banks have also been benefiting from a strong economy and robust investment banking activity, exemplified by the hot initial-public-offering market. In June, 32 of the nation's largest banks sailed through the Fed's stress test.
The upshot was a slew of dividend hikes and share buybacks. JPMorgan Chase, Wells Fargo, Morgan Stanley, and others announced double-digit increases to their payouts last month. A number of regional banks, including PNC Financial and Regions Financial, followed suit after reporting strong second-quarter profits in July.
UBS Investment Bank, which favors financials over REITs, recently compared the two sectors' " shareholder yield," which adds buybacks and dividends to get a better read on total cash returned to shareholders. Seen through that lens, financials yield close to 5%, compared with less than 3% for REITs. While buybacks aren't money in investors' pockets, lower share counts tend to translate into higher earnings per share and better total return.
"Buybacks plus dividends are up nearly 50% year over year for the Financials sector on a quarterly basis, as regulatory and earnings tailwinds have enabled companies to increase payouts," wrote the UBS equity strategy team led by Keith Parker. "We expect that to continue, helping support performance across Banks, IBs, and Consumer Finance."
The simplest way to invest in the banking sector is the Invesco KBW Bank ETF. The fund, with a 1.9% yield, has JPMorgan Chase, Bank of America, and Wells Fargo among its top holdings.
Investors who want to tilt away from those mega names, which tend to have higher price/earnings ratios and lower yields than regional banks, have another option: State Street SPDR S&P Bank. The ETF, with a 2.1% dividend yield, has an equal-weighted portfolio of about 100 U.S. bank and financial services stocks.
Preferred shares, many of which yield 5% to 7%, are another option. These securities, often regarded as a hybrid between stocks and bonds, are largely issued by banks. The Cohen & Steers Preferred Securities & Income fund, with about half of its assets invested in financials, yields 5.8%.
As for REITs, UBS notes that the housing market remains stuck in low gear, thanks to a weak single-family rental market, oversupply in the Sunbelt states, and other issues. The office market also remains spotty. There are bright spots, including REITs that focus on data centers and senior housing. The problem for income investors is that these names, like Welltower, Equinix, and Digital Realty, boast relatively low dividend yields and high P/Es.
Right now, banks, despite their comparatively low yields, offer a better shot at decent total returns.
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
July 23, 2026 01:30 ET (05:30 GMT)
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