Bank ETFs for Dividend Growth

January 30th at 8:00am by Todd Shriber

By now, many investors know the soap opera that is the dividend story for many U.S. banks.

Prior to the financial crisis, the financial services sector was a dividend destination. That changed for the worse in 2008, but over the past several years, financial services has been one of the largest contributors to S&P 500 dividend growth.

Investors love the concept of dividend as evidenced by the billions of dollars that flowed into ETFs that hold stocks with lengthy dividend increase streaks or companies that will be the next breed of dividend boosters. And it is a concept to be enamored by. Historical data proves as much.

From 1972 through 2012 companies that initiated or consistently raised dividends delivered superior returns and were less volatile than the companies either did not pay, cut or kept dividends stagnant, according to Ned Davis Research.

Bloomberg recently ranked the top 25 potential dividend growers pulled from a universe of 130 S&P 500 constituents expected to boost payouts over the next three years. The banks that appear on the list are as follows in ascending order: Comerica (NYSE: CMA), Bank of New York Mellon (NYSE: BK), KeyCorp (NYSE:  KEY), Morgan Stanley (NYSE: MS), Huntington Bancshares (NasdaqGM: HBAN), Discover Financial Services (NYSE: DFS), SunTrust (NYSE: STI), Regions Financial (NYSE: RF) and Citigroup (NYSE: C).

A well-known ETF, such as the Financial Select Sector SPDR (NYSEArca: XLF), can help investors capture some of that projected dividend growth. XLF, the largest sector ETF by assets, features Citigroup and Morgan Stanley (NYSE: MS) among its top-15 holdings.

When accounting for a small weight to Progressive (NYSE: PGR), also a member of the Bloomberg list, nearly 12% of XLF’s weight goes to some of the aforementioned stocks. XLF’s current dividend yield of 1.77% is nothing to swoon over, but the ETF’s payout is on the rise. XLF paid a dividend of about 32 cents per share last year, up from roughly 29 cents in 2012 and 23 cents in 2011, according to State Street data.

The PowerShares KBW Bank Portfolio (NYSEArca: KBWB) is another option to consider. In fact, the fund has previously been highlighted as a valid play on bank dividend growth. [ETFs for Banks Returning Capital to Shareholders]

Citi, SunTrust, Comerica and Regions combine for 22% of KBWB’s weight while Huntington, KeyCorp and Bank of New York Mellon combine for another 11%. As the table below indicates, KBWB’s 2013 payout was well above 2012’s.

KBWB Distribtuions

Chart Courtesy: PowerShares

Tickers

KBWB XLF