The past five years have been difficult for dividend investors. In an era of widespread tech disruption, the market has favored growth stocks that largely don’t pay dividends. At the same time, many mature companies that do pay high dividends are usually threatened by that disruption. And dividend payers that do have strong businesses tend to trade at very high valuations.
But the banking sector is one area where investors can find dependable, rising dividends at reasonable valuations today. Technology growth stocks, last year’s winners, have sold off on fears of higher interest rates, but most large banks stand to benefit from rising rates, which can boost their net interest margins. As such, banks may be excellent havens for risk-off older investors and retirees today. Among banks, perhaps none is better-suited for this risk-off cohort than Bank of America (NYSE:BAC).
Warren Buffett’s favorite
Warren Buffett sold many bank stocks last year, but he added to his Bank of America stake. Buffett’s conglomerate, Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), owns just over 1 billion shares, good for 11.4% of the Berkshire’s equity portfolio, and its second largest public equity holding overall.
Why does Buffett love Bank of America so much? Probably for its conservative underwriting philosophy under CEO Brian Moynihan, excitingly named “Responsible Growth.”
Since Moynihan took over in 2010, Bank of America has largely stuck to its knitting with straightforward lending, while avoiding risks and exotic products like those that recently got several banks in trouble with hedge fund Archegos Capital Management. In the wake of the global financial crisis, the retooled “Responsible Growth” strategy has four pillars:
- We must grow in the market, no excuses.
- We must grow with a customer focus.
- We must grow within our risk framework.
- We must grow in a sustainable manner.
That risk framework is meant to be conservative, long-term-oriented, and focused on the bigger picture. As the strategy was implemented, Bank of America’s net profits have become steadier and more consistent.
Even in the pandemic year, in which some banks saw earnings go negative, with some even needing to temporarily cut their dividends, Bank of America generated $17.9 billion in net income and maintained its payout, now yielding 1.82%. Thanks to conservative underwriting, net charge-offs only rose slightly, from $3.6 billion in 2019 to $4.1 billion in 2020. Being extremely well-capitalized, Bank of America has been given the green light to resume share buybacks by the Federal Reserve.
And investing in the future
While some believe traditional banks are under threat from digital fintech upstarts, the largest and best-run banks still have competitive advantages. These include large, nationwide bank branch networks, which enable lower-cost deposits, as well as the financial means to invest…