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7 Reasons to Buy Bank Stocks Now

NEW YORK ( TheStreet) -- While the broader market has cobbled together a nice run since Sept. 1, major financial stocks have been largely sitting out the rally. Though the S&P 500 has tacked on 11% and the tech-heavy Nasdaq has enjoyed gains of more than 14%, the big banks haven't kept pace. Laggard Bank of America (BAC - Get Report) shares have actually been in the red over the last 10 weeks despite Wall Street's surge.

But while other sectors have been stealing the spotlight, financials could turn around in coming months. A convergence of seven major trends could create a favorable environment for banks that create short-term and long-term profit opportunities.

Here are seven big reasons to buy banks now, before they take off:

1 -- Fed to Allow Dividend Increases

Income investors haven't had much to love about banks since the dividend carnage of 2008 and 2009. Take Citigroup (C - Get Report). In the summer of 2008, the bank had an annualized dividend yield north of 7% with a 32-cent dividend paid Aug. 22 and shares trading at about $18. In October 2008, that payout was slashed in half to 16 cents, and it disappeared altogether soon after. Even "healthy" banks like Wells Fargo (WFC - Get Report) scorched the earth. WFC slashed its payout 85% in spring 2009, from 34 cents to just 5 cents, and Wells Fargo's yield is a disappointing 0.7% as of this writing.

But lean dividend days may be over for bank stocks. The Federal Reserve is ready to sign off on increased dividend payments (for the healthy banks, of course) for the first time since the financial crisis. Details have not emerged yet, and regulators are sure to take a slow and conservative approach. But getting into these stocks now before the dividend boosts -- and subsequent buying pressure from yield-hungry investors -- could be an excellent move that pays off twice in the form of some nice share appreciation coupled with a quarterly payday.

2 -- Sector Rotation Favors Financials in 2011

Financials have essentially been dead money for the last year. The "best performing" major banks including Citi and PNC Financial Services (PNC - Get Report) slogged out 10% gains in the last 12 months compared with about 15% gains for the S&P 500 index. Not surprisingly, many investors and money managers have been avoiding banks like the plague.

A Nov. 5 report from Credit Suisse titled "Small & Mid Cap U.S. Equity Strategy" indicates portfolio managers are severely underweight the entire financial sector -- and as we move further away from the financial crisis and rays of hope peek through the clouds, institutional money is bound to return. The ride in tech and materials has been nice but likely won't be duplicated in 2011. Tech-sector holdings are at four-year highs in small-cap funds, while the Credit Suisse report said financial stocks allocations are near mid-2008 lows seen when Lehman Bros. and Bear Stearns were about to evaporate. That bias against financials has to break, and it could break very soon.
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BAC $14.36 -2.78%
C $45.57 -2.38%
JPM $62.56 -1.93%
PNC $86.87 -1.18%
WFC $50.00 -1.17%


Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

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