I'm Looking to This "Hated" Sector for Yields of up to 8%

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In the late 1990s, I was on the Board of Trustees for a nonprofit educational organization. The board's primary responsibility was to oversee the investment of the organization's trust funds, worth roughly $5 million.

One of the trust funds was used to grant college scholarships. So it was very important that the fund generate a steady stream of income to cover the 50-plus scholarships funded every semester.

Even though it doesn't seem so long ago, so much has changed since then. For one thing, we had only a fraction of the income-producing choices investors have today. When it came to dividend-paying equities, we had to rely on a handful of consumer blue-chip and utility stocks. Oh -- and bank stocks. That's another thing that has changed.

Bank stocks were a stable and reliable source of dividends. They were slow-growers, but could be counted on for solid, dependable cash flow .

But banks -- specifically the large investment banks -- began to take on higher and more leveraged risk. This made the banking sector vulnerable when the housing bubble burst. And small banks holding local mortgage debt and small business loans took it on the chin as the crisis turned into a recession . More than 400 banks and thrifts have failed since the beginning of 2008. And many once-stable dividends disappeared in the blink of an eye.
 
The banking sector has been slow to recover. For instance, the Financial Select Sector SPDR (NYSE: XLF ) , which tracks an index of some of the largest U.S. financial institutions, is still roughly 60% below the price it was five years ago.

That being said, some positive signs are emerging from the banking sector, particularly among the regional banks. And now, I'm eyeing them as potential additions to my income advisory, The Daily Paycheck .

In my role as chief investment strategist, I've turned $200,000 of seed money into roughly $243,000 -- and counting -- since December 2009, simply by using a dividend reinvestment strategy.

And it's paying off...

So far, I've received $27,215.75 in dividend paychecks (last month's paychecks totaled nearly $2,000 alone.) And the average yield of a stock my portfolio is more than 7%.

Regional banks can oftentimes yield 7% or 8%, so when I see evidence of resurgence in these once-reliable dividend payers, you can bet I'm interested.
 
In the chart below, you can see that regional banks, as measured by the S&P Regional Banking SPDR ETF (NYSE: KRE ) , have started to outperform the bigger financial institutions. And in the past year, KRE was able to catch up with the S&P 500.


 
Why the rebound in this banking niche?

Regional banks aren't facing the same kind of legal issues associated with the mortgage industry like their larger peers. And some large financial institutions have decreasing revenue streams because they have had to terminate their in-house trading operations -- something regional banks never had.

Granted, it is still a challenging environment. Regional banks aren't making as much on their customer deposits due to the low interest-rate environment. And some regional banks are still contending with nonperforming mortgage and business loans.

Stable and improving prices equity prices are a good sign. But it takes more than that to make a Daily Paycheck portfolio pick. It takes yield.

I specifically look for securities that yield 5% or more. With this in mind, I conducted a screen of regional banks with a market capitalization of greater than $500 million and a dividend yield above 5%. The top five banks from my screen are listed below.



Risks to Consider: Some of the stocks in this table have payout ratios that you might find a little uncomfortable. If one of these banks faces short-term headwinds and has an earnings shortfall, it may be forced to cut the dividend if it doesn't have enough cash to cover the payment.

Action to Take --> I look for investments that have solid track records for dividend growth. First Financial Bancorp. (Nasdaq: FFBC ) has done a great job of growing its dividend in these challenging times, leading me to name it in The Daily Paycheck as my top pick.

I'm not quite ready to jump in, though. I'd like to see a few more months of stable economic and employment data. If that should happen, then this sector is likely the first place I'll look. And you can bet First Financial will be near the top of my list.

 
-- Amy Calistri

Amy Calistri does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.


This article appears in: Investing , Investing Ideas

Referenced Stocks: FFBC , KRE , XLF

Amy Calistri

Amy Calistri

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