Why Bank Stocks May Be A Better Than Bonds Right Now - Stocks - Options - Mutual Funds Article - bonds, citibank, bank of america

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Why Bank Stocks May Be A Better Than Bonds Right Now

Article Submitted by: Sam Cass
Stocks - Options - Mutual Funds

Tags: Bonds, Citibank, Bank of america, Banking stocks, Year bond, Bonds versus stocks.

Several good reasons why you might want to consider parking your money in several banking stocks instead of the 10 year bond.

Submitted: Jul 24, 2007 Views: 832 Comments: 2 Likes: 2

I was looking into purchasing some 10 year bonds and stumbled across an article in Fortune that talked about bank stocks. Banks are very cheap at the moment and some of them are paying dividends that are as good, if not better than the 10 year bond. The 10 year pays about 5% and the income is taxes at normal rates. Today, Bank of America yields 4.5% and the company is expected to raise its dividend to 5.1% later this month. Other banks have similar profiles. Dividends are also taxed at a lower rate, making the net return higher than 10 year bonds.

On top of that, bank stocks have very low PEs and are relatively inexpensive. The public has broadly discounted the banking sector because of the sub-prime loan meltdown but companies like Citibank and Bank of America do not have wide exposure to this market. If they did, they long ago packaged the loans and removed the risk from their balance sheets.

A great dividend, favorable tax treatment, and upside potential make banking stocks a decent alternative to a 10 year bond.

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Comments Received:

JRodgers

Not! There is a real widening of credit spreads right now. They are too narrow. That means there will be a real strong selling of risk assets and rush into risk-free assets. In this environment, treasuries will do well, and banks will get hit.

Posted: Jul 25, 2007

Sam Cass

I'm not sure I agree. I don't see spreads widening much in the short term. If anything, the long bond seems to be going up a bit. Most of these banks are pretty diversified anyway, so if spreads do narrow they can make money on fees, trading, etc. Many of these banks are also not as dependent on deposits as a source of funds as they used to be.

Posted: Jul 26, 2007

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