Big Dividend Boosts Could be on the Way For Bank ETFs

The results of the Federal Reserve’s Comprehensive Capital Analysis and Review, or CCAR, are expected to be released on June 27 and that could lead to significant improvements in shareholder rewards at some of the nation’s largest banks.

That could benefit exchange traded funds, such as the Invesco KBW Bank ETF (NASDAQ: KBWB), SPDR S&P Bank ETF (NYSEArca: KBE) and the Financial Select Sector SPDR (NYSEArca: XLF).

“The results of the stress tests, which examine the capital adequacy of each company, are mandated by the Dodd-Frank Act. During the financial crisis of a decade ago, there was a liquidity squeeze and some banks didn’t have enough capital to survive. Both tests were created in response to those events,” reports Lawrence Strauss for Barron’s.

Since the end of the global financial crisis, during which many stocks were egregious dividend offenders, the financial services sector has been a leader in terms of domestic dividend growth. That trend is expected to continue.

Strong Growth for Financial Firms

For investors, the good news is bank stocks’ fundamentals are improving, risks with the group are declining and valuations are low. Additionally, the sector’s valuations are significantly depressed following last year’s slide. While valuations for financials are low, earnings growth remains solid.

“CCAR includes both a quantitative evaluation of a firm’s capital adequacy under stress and a qualitative assessment of its abilities to determine its capital needs,” according to Barron’s. “It takes into account the actual capital plans, including dividends and buybacks, that the individual firms are seeking. Failing this test would likely lead to restrictions on a bank’s dividend payments.”

A flattening yield curve previously fueled outflows in the financial sector, but a stable yield curve and better-than-expected earnings growth helped reignite investment demand for the sector over April. Financials in particular appear attractive on an absolute and relative basis to the S&P 500. XLF, the largest financial services ETF by assets, has a dividend yield of just 2.01%.

“In a recent research note, Goldman Sachs cited a survey showing that investors ‘once again anticipate strong dividend growth’ for the large financial firms,” reports Barron’s.

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