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5 Bank Stocks With High Dividends You Can Trust (Update 1)

Updated with commentary on banking industry trends for dividend increases from KBW.

NEW YORK ( TheStreet) -- Common stocks of banks are becoming increasingly attractive for income-seeking investors and now is the time to see what fits best for your portfolio.

New preferred stock issues have seen rates significantly decline this year and, of course, the Federal Reserve's most recent economic stimulus moves aren't helping matters, as the central bank continues doing everything it can to keep long-term rates low.

This, or course, is no help for income-seeking investors, however, the growing evidence of a housing recovery is good news for bank stocks, many of which are still trading below their typical valuations to book value and forward earnings estimates, and with quality names easily covering generous dividend payouts, there are some solid growth and income plays out there.

KBW on Thursday published some statistics showing a power trend for dividend increases in the banking industry. According to KBW analyst Melissa Roberts, "44 banks increased, initiated or reinstated their quarterly cash dividend" during the third quarter, and of that total, 25 had received government bailout assistance through the Troubled Assets Relief Program, or TARP, "that fully repaid their TARP investment."

Meanwhile, only two two banks cut their dividends during the third quarter, while two skipped a dividend, and one publicly traded bank -- United Community Bancorp (UCBA) of Lawrenceburg, Ind. -- discontinued paying a dividend.

Roberts added that "Since 2011, 147 banks engaged in 264 dividend increases (inclusive of initiations and reinstatements)."

Beginning with bank and thrift stocks rated a "Buy" from TheStreet Ratings, we then used data provided by Thomson Reuters Bank Insight to narrow the list down to the actively traded names -- with average daily trading volume of over 40,000 shares -- that have the highest dividend yields, while also paying out less than 60% of their earnings over the past 12 months through June 30.

TheStreet Ratings takes a very conservative, long-term approach to stock ratings, placing its emphasis on long-term total returns as well as revenue trends and capital strength and dividends. The ratings also consider short-term performance, financial stability and volatility.

When we took a similar approach to identifying bank stocks with safe and attractive dividend yields back in early June, JPMorgan Chase (JPM - Get Report) made the cut, because the stock had tanked in the wake of CEO James Dimon's initial announcement of the hedge trading losses resulting from the activity of the "London Whale."

Following Dimon's announcement in May, JPMorgan announced it was suspending its common share buybacks, but planned to maintain its dividend. When JPMorgan's stock closed at $31.00 on June 4, the shares had a dividend yield of 3.87%, based on a quarterly payout of 30 cents.

Since then, JPMorgan posted a second-quarter profit of $5 billion, despite booking $4.4 billion in hedge trading losses. The shares have recovered 32%, closing Tuesday at $40.92, with the dividend yield declining to a still-attractive 2.93%, which among the 24 components of the KBW Bank Index (I:BKX) is only exceeded by Peoples United Financial (PBCT - Get Report) and New York Community Bancorp (NYB).
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