Financials poised to gain
While the broader market has cobbled together a nice run since Sept. 1, major financial stocks have largely been sitting out the rally.
Though the S&P 500 (SPX 1,219, +5.31, +0.44%) has tacked on 11% and the tech-heavy Nasdaq (COMP 2,579, +15.80, +0.62%) has enjoyed gains of more than 14%, the big banks haven’t kept pace. Laggard Bank of America Corp. (BAC 12.48, -0.09, -0.72%) shares have been in the red over the last 10 weeks, despite Wall Street’s surge.
But while other sectors have been stealing the spotlight, financials could turn around in coming months. A convergence of seven major trends could create a favorable environment for banks that create short-term and long-term profit opportunities.Recently:
Here are seven big reasons to buy banks now, before they take off:
Federal Reserve to allow dividend increases
Income investors haven’t had much to love about banks since the dividend carnage of 2008 and 2009. Take Citigroup (C 4.40, -0.02, -0.45%) . In the summer of 2008, the bank had an annualized dividend yield north of 7% with a 32-cent dividend paid Aug. 22, and shares trading at about $18. In October 2008, that payout was slashed in half, and it disappeared altogether soon after. Even “healthy” banks like Wells Fargo & Co. (WFC 28.32, -0.26, -0.91%) scorched the earth. Wells Fargo slashed its payout 85% in spring of 2009 from 34 cents to just 5 cents, and Wells Fargo’s yield is a disappointing 0.7% as of this writing.
But lean dividend days may be over for bank stocks.
The Federal Reserve is ready to sign off on increased dividend payments (for the healthy banks, of course) for the first time since the financial crisis. Details have not emerged yet, and regulators are sure to take a conservative approach. But getting into these stocks before the dividend boosts — and subsequent buying pressure from yield-hungry investors — could be an excellent move that pays off twice in the form of some nice share appreciation coupled with a quarterly payday. Read more about whether and when to sell dividend-paying stocks at InvestorPlace.com.
Sector rotation favors financials in 2011
Financials have essentially been dead money for the last year. The “best performing” major banks, including Citi and PNC Financial Services (PNC 57.04, -0.28, -0.49%) , slogged out 10% gains in the last 12 months, compared with about 15% gains for the S&P 500 index. Not surprisingly, many investors and money managers have been avoiding banks....MORE
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