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5 Buy-Rated Bank Stocks With Highest Dividend Yields

NEW YORK ( TheStreet) -- Heading into third-quarter earnings season, this is a good time for a periodic look at quality bank stocks paying out the highest dividends to investors.

Beginning with bank and thrift stocks rated a "buy" from TheStreet Ratings, we used data provided by Thomson Reuters Bank Insight to narrow the list down to the five banks paying the highest dividend yields, that also have average daily trading volume of at least 20,000 shares. These banks are all paying rather high percentages of earnings out to investors in the form of dividends. The largest U.S. banks are unable to do this, because the Federal Reserve prefers, at least for now, to hold dividend payouts to roughly 30% of earnings.

Many of the largest U.S. banks have instead focused on share buybacks. For example, JPMorgan Chase (JPM - Get Report) in March received Federal Reserve approval for buybacks totaling up to $6 billion through March 2014. The company's quarterly dividend was raised during the second quarter to 38 cents a share from 30 cents, and the dividends will come to roughly $6 billion this year. Based on the 28-cent quarterly dividend and the consensus 2013 earnings estimate of $5.83 among analysts polled by Thomson Reuters, JPM's dividend payout ratio is about 26%.

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

But the ratings don't factor in dividend payout ratios. All five of the banks listed below have high dividend payout ratios. However, all had decent operating returns on average assets of at least 0.78% for the 12-month period ended June 30, and have solid long-term track records for profitability.

KBW analyst Collyn Gilbert in a report discussing industry earnings prospects for 2014 and 2015 on Sept. 24 took a positive tone when discussing community banks with high dividend yields. "As the banking industry has significantly rebuilt its capital position, and could be at a cyclical low point in earnings, we think future dividend cuts are an unlikely risk facing the sector," she wrote.

Some investors and analysts will continue to question the ability of some of these banks to maintain high dividend payouts, but regulators are focusing their scrutiny on banks with total assets of above $50 billion and only one of these names is close to that important threshold. It is also important to note that price-to-forward-earnings multiples have climbed considerably this year, as bank stocks have risen, and that this has also sent dividend yields lower.

Here are the TheStreet's five buy-rated banks with the highest dividend yields, ordered by ascending yield:

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