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Finding Dividend Growth With Financial Services ETFs

December 29, 2015 1:24 pm
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Finding Dividend Growth With Financial Services ETFs

Dividend investors know how the story goes. Prior to the global financial crisis, bank stocks were some of the most reliable dividend payers among U.S. equities. Not only that, but major banks were also dependable dividend growers and decades of dividend growth from U.S. banks made the financial services sector the largest dividend-paying group in the S&P 500.

The crisis undid decades worth of dividend ebullience from big banks in short order, leaving some income investors scorned and doubting the sector's future dividend growth prospects. Fast-forward to 2015 and after several years of dividend stress tests, bank stocks are once again boosting payouts, bolstering the dividend allure of exchange-traded funds such as the Select Sector Financial Slct Str SPDR Fd (NYSE: XLF).

Related Link: Guess What? It’s Time For Bank ETFs

Looking Closer At XLF

Nearly all of XLF's major holdings, including the likes of Wells Fargo & Co (NYSE: WFC) and Dow component JPMorgan Chase & Co. (NYSE: JPM), were dividend offenders during the crisis.

XLF entered Tuesday with a trailing 12-month dividend yield of 1.8 percent, or 40 basis points below the yield on 10-year Treasurys, but the ETF and its rivals also offer ample dividend growth potential.

“Back in 2007, 29 percent of the S&P 500’s dividend income came from banks and other financial stocks. The financial crisis brought that number down sharply. By 2012, financials were contributing just 13 percent of the S&P’s dividends, behind consumer staples and technology,” according to the Wall Street Journal.

“Financials have regained their lead position, however. As of June 30, 2015, they produced 15.5 percent of the S&P’s dividends, higher than any other sector.”

XLF is reflecting that dividend growth. In 2007, the largest financial services ETF paid an annual dividend of nearly 83 cents per share. By 2009, that payout had been slashed to just over 21 cents per share. This year, XLF's dividend checked in north of 45 cents a share, according to State Street Global Advisors data.

Related Link: Investors Are Flocking To This New ETF

Nine of XLF's top 10 holdings are dividend payers, with the outlier being Warren Buffett's Berkshire Hathaway Inc. (NYSE: BRK-B), which is interesting because Berkshire is benefiting from the dividend growth of XLF's big-name holdings because the Nebraska-based conglomerate is a major shareholder in the likes of Wells Fargo, U.S. Bancorp (NYSE: USB) and American Express Company (NYSE: AXP).

“Banks must demonstrate to regulators that they could keep paying their dividend even in a deep, world-wide recession. As a result, the dividends of the biggest banks may be the safest payouts in the world. There is approximately zero chance that they would have to be cut in any realistic economic scenario,” added the Journal.

In terms of dividend growth, JPMorgan Chase and Wells Fargo have been delivering on that in recent years, but with annual dividends of just 20 cents a share apiece, Bank of America Corp (NYSE: BAC) and Citigroup Inc (NYSE: C) could be the next frontiers of massive dividend growth among XLF constituents. Those stocks combine for 11.3 percent of XLF's weight.

Disclosure: Todd Shriber owns shares of XLF.

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