Why Bank Stocks May Be A Better Than Bonds Right Now

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

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.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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Comments

  • Anonymous

    July 25, 2007

    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.

  • Anonymous

    July 26, 2007

    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.

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