The S&P 500 has been charging higher in 2013, producing an
impressive 16%gain in just the first five months of theyear . But
certain sectors have performed better than others.
At the bottom of the table are basic materials, down 3.4% on
the year due to big losses in gold and miningstocks . At the top
is health care, up 28% on the year. But a close second is
financials, posting an impressive 20% gain. That strong
performance has been driven by two keyfactors .
Housing is the single most importantfactor affecting the growth
of theeconomy . And nowhere is its impact bigger than in
financial services. Financial services companies carry huge
exposure to the housing industry and its wide range of financial
And in 2013, key housing data continue to lookbullish . According
to the Case-Shiller S&P 500 House PriceIndex , home prices
are continuing to rise, with prices up 10% from last year in its
latest reading from February. In addition to values
rebounding,sales volumes are up and delinquency rates are down,
providing additional tailwinds to financial sectorearnings .
This is just a simple matter of economic growth.
Althoughunemployment remains high andinflation low, the economy
continues to expand, posting a gain of 2.2% in 2012. The New York
Federal Reserve is calling for that bullish trend to continue,
projecting growth of 2.5% in 2013.
Financial services companies provide investors with leveraged
exposure to economic growth, a factor that can produce biggains
in an expansionary environment (as well as big losses in a
With strength in housing and ongoing economic expansion fueling
the financial sector, the
Vanguard FinancialsETF (
is up 20% this year, a 25% premium to the S&P 500's 16%
Despite those impressive gains, the financial services sector
still boasts some of themarket 's biggest dividend yields. That's
because financial companies are frequently structured asreal
estate investment trusts (REITs) andlimited liability companies
(LLCs), requiring them to pay 90% of theirincome as a
distribution to shareholders.
And with financial companies raking in big profits from the
rebound in housing and general economic growth, investors are
cashing in on eye-popping yields. In an environment of record-low
interest rates, a highyield becomes even more attractive. With
the 10-yearTreasury note yielding a paltry 1.9%, many income
investors have rotated into riskier assets in pursuit of
A popular destination has been financial services stocks that
pay dividends, giving birth to the recentwave of private-equity
IPOs such as
Blackstone Group (
Carlyle Group (Nasdaq: CG)
Picking up dividends is also a great tax strategy. Dividends are
classified ascapital gains and taxed at a lower rate.
High-yieldequities will be more volatile than the 10-year
Treasury, but investors will also be compensated for that risk
with huge dividends.
Here is a list of seven high-yield stocks from the financial
sector that carry outsize dividend yields.
From the list, I have chosen to highlight
InvescoMortgage Capital (
because of its attractive valuation and
Newcastle Investment (
because of its outsizedividend yield and upward momentum.
Invesco Mortgage Capital
Invesco Mortgage Capital is a REIT that invests in, finances and
manages residential- and commercial-backed securities andloans .
As a mortgage specialist, Invesco has been well positioned
tocapitalize on the rebound in home values, rising mortgage
volumes and lower delinquency rates. That hasanalysts looking for
full-year earnings of $2 a share this year.
With a price-to-earnings (P/E ) ratio of 8 times, below its peer
average of 10, Invesco has value in addition to a serious yield
Newcastle Investment operates as a real estate investment and
finance company that invests in and manages a portfolio of real
estate securities, loans and mortgage services.
The company has been hot in 2013, withshares up a market-beating
29%. But in spite of that bullish movement, Newcastle's forward
P/E ratio of 4 times is less than half its peer average of 9. And
with a 15% yield, Newcastle is a powerful source of income.
Risks to Consider:
Dividend yields can fall due to fluctuations in earnings and
distributions. The flip side of the financial services sector's
exposure to economic growth is its potential for big losses in a
Action to Take -->
Financials have been one of the top performing sectors of the
year, producing an outsize 20% gain. But in spite of that bullish
movement, financials carry some of the biggest yields in the
market. Consider Invesco Mortgage Capital for its attractive
valuation and Newcastle Investment for its dividend yield and
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