Updated with comments on the "fiscal cliff" from FBR financial policy analyst Edward Mills.
NEW YORK ( TheStreet) -- Even though the "fiscal cliff" may put a damper on dividend income, many bank stocks are paying dividend yields that are especially attractive in the prolonged low-rate environment.
With the presidential election has been settled, FBR financial policy analyst Edward Mills wrote on Wednesday morning that although "it will take several days for the full narrative of the election to develop, we view the result as significantly increasing the volatility related to the negotiations on the 'fiscal cliff.' With a slim margin for the President and Republican control of the House, both sides could argue that they have the upper hand in negotiations and will view the election as a validation of their positions."
The "fiscal cliff" refers to the expiration of tax cuts enacted when George W. Bush was president and extended by President Obama in August 2010, as a result of negotiations with Republican members of Congress to raise the federal debit ceiling. Without further action from the President and Congress, the tax cuts will be reversed, and there will be major federal spending cuts, which many economists believe will push the U.S. economy back into recession.Mills said that with President Obama being reelected, while the Rebublicans maintained control over the House of Representatives, "We do believe that the chances of going off the cliff (at least temporarily and before a deal is reached to punt) has increased." For income-seeking investors, the biggest immediate headache if we fall off the fiscal cliff will be the elimination of the 15% maximum federal income tax rate on qualified dividend income. Investors will need to carefully analyze investment options according to their federal and state tax scenarios. Of course, with interest rates being so low for so long, many investors will still find many common stocks, including bank stocks, with attractive dividend payouts, when compared to other income investment alternatives. TheStreet last month used a conservative approach to identify five bank stocks that are actively traded with relatively safe dividends, as the group had paid dividends of less than 60% earnings over the previous 12 months. This group was also limited to stocks rated a "Buy" by TheStreet Ratings. This time we have simply identified the three actively traded banking names with the highest dividend yields based on regular quarterly payouts, without considering the dividend payout ratio, ratings, or even the level of profitability. This "stick to the wall" approach provides a list of names with very attractive dividend yields, most of which have paid dividends nearly equal to their earnings over the past year. Then again, the group is solidly profitable, and even the Federal Reserve appears set to allow some of the large banks facing the greatest scrutiny to pay out a high percentage of earning next year. Considering how much excess capital some of the large regional players have, even the Federal Reserve is expected to allow some banks to return capital in 2013 through dividends and share buybacks in amounts close to or even exceeding earnings, following the next round of regulatory stress tests early next year. That being said, a high dividend payout ratio underlines the need for a prospective investor to scrutinize the company, and the stock, and carefully consider investment objectives and horizons before jumping in. By limiting our selection to companies with high dividend yields based on regular quarterly dividends we have left out a few stocks of bank holding companies that are paying out "variable" dividends based on earnings performance and on a strategy of reducing excess capital. One of these companies is First Financial Bancorp (FFBC - Get Report) of Cincinnati, which pays a regular quarterly dividend of 15 cents a share, plus a variable dividend each quarter, in order to pay out 100% of earnings. Based on the company's third-quarter earnings of 28 cents, the company declared a variable dividend of 13 cents a share, for a 28-cent dividend and a yield of 7.23%, based on Monday's closing price of $15.50. First Financial also has a new share buyback in place, under which the company expects "repurchase approximately 1,000,000 shares annually over a five year period," according to CEO Claude Davis, who said on Oct. 25 when the company announced its third-quarter results that "repurchases are not anticipated to impact the variable dividend, which we expect to continue through 2013 unless the Company's capital position changes materially or capital deployment opportunities arise that move us towards our capital thresholds sooner than expected." Davis also said that "despite returning greater than 100% of our earnings to shareholders through 2013 and targeting a long term return of 60% - 80% of the capital we generate through dividends and share repurchases, we expect to maintain a sufficient level of excess capital to support growth initiatives." Here are the three actively traded bank stocks -- with average daily trading volume of at least 50,000 shares --with the highest dividend yields, based on ordinary quarterly payouts, according to data supplied by Thomson Reuters Bank Insight: