Pairing Dividend Aristocrats With Bank ETFs

Income seeking investors know all about the dividend aristocrats. Those are the companies that have been raising their dividends for at least 25 straight years. They’re ideal for retirees and just about anybody else looking for dividend income in their portfolio because of their predictability. They’re not necessarily the highest yielding stocks but their steadiness is their real appeal.

Not surprisingly, one sector of the market that is essentially absent from the list of aristocrats is the banks. Any dividends they were paying were essentially wiped out during the financial crisis. Consider for a moment my favorite dividend aristocrat fund, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). As of the end of the second quarter, it had roughly 10% of assets in the financial sector. But look at who that 10% is comprised of - Aflac (AFL), T. Rowe Price (TROW), Franklin Resources (BEN) and Cincinnati Financial (CINF). That’s two insurance companies and two asset managers. Not a single bank to be found.

If you’ve followed the financial sector, you probably know that a month ago, the Federal Reserve approved the capital return plans of all 34 banks that it was reviewing as part of its Comprehensive Capital Analysis and Review (CCAR). Following the announcement, many of the banks unleashed plans for dividend increases and share buybacks. Citigroup (C) doubled its dividend, while Bank of America (BAC) raised its by 60%. Other big banks such as Morgan Stanley (MS), Wells Fargo (WFC) and JPMorgan Chase (JPM) all now have yields in the 2-3% range. Bottom line: Dividend seekers may have written off the banks, but it’s now time to put them back on the radar.

Investors who focus primarily on the aristocrats for income are likely missing out on the dividend growth potential that now exists in the banking space. Dividend Aristocrats ETF shareholders who want to add exposure to the financial sector may wish to pair the fund up with a financials ETF. None of the biggest financials ETFs yields more than 2%, so you won’t be getting a yield boost (unless you want to venture into riskier areas such as foreign or small cap banks). The main benefit is a more diversified income stream.

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Disclosure: None. 

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