7 Best Financials Sector Dividend Stocks

These dividend growth stocks are my top-ranked Financials Sector picks. Four of these stocks are trading at discounted valuations!
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In this article series, I present the top-ranked dividend growth stocks in each GICS sector. My watch list for candidates is Dividend Radar, a list of stocks trading on U.S. Exchanges with dividend increase streaks of at least five years. The list is updated and published every Friday and is available for download here. The latest edition (dated July 16, 2021) contains 762 stocks, 267 of which are in the Financials sector.

Sector diversification is one of the ways to mitigate portfolio risk. Investing in different sectors recognizes the fact that some sectors perform better than others in different economic conditions.

Sector investing can help investors position their portfolios for the next business cycle shift. (source: Fidelity Investments)

Sector investing can help investors position their portfolios for the next business cycle shift. (source: Fidelity Investments)

This article presents the seven top-ranked dividend growth stocks in the Financials sector. Here are the previous articles in this series, in case you missed them:

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The Financials Sector

The Financials sector includes all companies involved finance, investing, and the money management. This includes banks, credit card issuers, credit unions, insurance companies, and mortgage REITs (real estate investment trusts). Financials are an important barometer of the economy and their performance is closely monitored by investors at all stages of the economic and business cycles.

A detailed breakdown of the Financials sector (source: Dividend.com)

A detailed breakdown of the Financials sector (source: Dividend.com)

Sector and Performance Comparison

Let’s compare the sector averages and historical performance of the GICS sectors over different periods to see how the Financials sector compares:

Sector averages of Dividend Radar stocks and the historical performance of sectors (data sources: Dividend Radar 16 July • Fidelity Research and Google Finance 21 July)

Sector averages of Dividend Radar stocks and the historical performance of sectors (data sources: Dividend Radar 16 July • Fidelity Research and Google Finance 21 July)

The table is color-coded to show the highest (green) and lowest (red) values in each column. With 267 stocks, the Financials sector has the largest representation (by far) in Dividend Radar. Furthermore, the Financials sector is the top performer over the past year, as is evident in the 1-Yr performance column.

Sector performance charts give another interesting perspective, especially when comparing those performances to the performance of the S&P 500:

Sector performance charts (created by the author with data from Fidelity Research, 21 July 2021)

Sector performance charts (created by the author with data from Fidelity Research, 21 July 2021)

The Financials sector underperformed the S&P 500 over the past 1-month and 3-month periods, as well as over the past five years. Looking at the 1-year time frame, though, we see the Financials sector has easily outperformed the S&P 500 and was the top-performing GICS sector.

Quality Assessment

To assess the quality of dividend growth stocks, I use DVK Quality Snapshots, a simple and elegant system developed by David Van Knapp. The system employs five quality indicators and assigns 0-5 points to each quality indicator, for a maximum of 25 points.

I use my own ranking system, sorting stocks by descending quality scores and breaking ties using the following factors, in turn:

  • SSD Dividend Safety Scores
  • S&P Credit Ratings
  • Dividend Yield

I rarely need to break ties with Dividend Yield.

Stocks are rated by quality score as Exceptional (25), Excellent (23-24), Fine (19-22), Decent (15-18), Poor (10-14), and Inferior (0-9). Investment Grade ratings have quality scores in the range of 15-25, while Speculative Grade ratings have quality scores below 15.

Top-Ranked Financials Sector Stocks

Here are the seven top-ranked dividend growth stocks in the Financials Sector:

Screen Shot 2021-07-22 at 9.17.12 AM

Note that I’m long the highlighted tickers in my DivGro portfolio.

1. BlackRock, Inc. (BLK)

BLK is an investment management company that provides a range of investment and risk management services to institutional and retail clients across the world. The company’s offerings include single and multi-asset class portfolios investing in equities, fixed income, alternatives and money market instruments. BLK was founded in 1988 and is based in New York City.

2. CME Group Inc. (CME)

CME, through its subsidiaries, operates contract markets for the trading of futures and options on futures contracts. The company also provides clearing and settlement services for exchange-traded contracts, as well as for cleared swaps; and regulatory reporting solutions for market participants through its global repository services in the United States, the United Kingdom, Canada, and Australia. CME was founded in 1898 and is headquartered in Chicago, Illinois.

3. Chubb Limited (CB)

CB is the world’s largest publicly traded property and casualty insurance company with operations in more than 50 countries. The company offers commercial and personal property and casualty insurance, personal accident and supplemental health insurance, reinsurance, and life insurance to a diverse group of clients. CB was founded in 1985 and is headquartered in Zurich, Switzerland.

4. T. Rowe Price Group, Inc. (TROW)

Founded in 1937, TROW is a financial services holding company that provides global investment management services to individual and institutional investors in the sponsored T. Rowe Price mutual funds and other investment portfolios, as well as through variable annuity life insurance plans. TROW is based in Baltimore, Maryland.

5. Globe Life Inc. (GL)

GL, through its subsidiaries, provides various life and supplemental health insurance products, and annuities to lower middle to middle income households in the United States. The company operates through four segments: Life Insurance, Supplemental Health Insurance, Annuities, and Investments. GL was incorporated in 1979 and is headquartered in McKinney, Texas.

6. The Toronto-Dominion Bank (TD)

TD a Canadian chartered bank that provides a wide range of financial and banking services in North America and internationally. Services include checking and savings accounts, credit cards, mortgage and student loans, trusts, wills, estate planning, investment management services and financial and advisory services. TD was founded in 1855 and is headquartered in Toronto.

7. Royal Bank of Canada (RY)

RY operates as a worldwide diversified financial service company, operating in five sectors: Personal & Commercial Banking, Wealth Management, Insurance, Investor & Treasury Services, and Capital Markets. The bankhas a strategic partnership with Royal College Of Physicians & Surgeons Of Canada to support the needs of Canada's medical specialists. RY was founded in 1864 and is headquartered in Toronto, Canada.

Please note that these stocks are candidates for further analysis, not recommendations.

Key Metrics and Fair Value Estimates

Below, I present key metrics of interest to dividend growth investors, along with quality indicators and fair value estimates. These include the dividend increase streak (Yrs), the DVK quality score (Qual.), the dividend Yield for a recent Price, and the 5-year compound annual dividend growth rate (5-Yr DGR).

I also provide fair value estimates (Fair Val.) to help identify stocks trading at favorable valuations. The last column shows the discount (Disc.) or premium (Prem.) of the recent price to my fair value estimate.

Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

Sources: Dividend Radar • Value Line • Morningstar • FASTGraphs • Simply Safe Dividends

To estimate fair value, I reference fair value estimates and price targets from several sources, including Morningstar and Finbox. Additionally, I estimate fair value using each stock’s 5-year average dividend yield using data from Simply Safe Dividends. Finally, with several estimates and targets available, I ignore the outliers (the lowest and highest values) and use the average of the median and mean of the remaining values as my fair value estimate.

Commentary

The top-ranked Financials sector stocks are rated Excellent (quality scores 23-24) and Fine (quality scores 19-22) and only four are presently discounted. I own five of these stocks, the #1 ranked BLK, and four more stocks rated Fine (CB, TROW, TD, and RY).

Of the discounted stocks, I think TD presents the best value at the moment. Discounted by 8% to my fair value estimate of $71, TD offers the highest yield and a solid 5-year DGR of 8.7%. The stock’s 5-year yield on cost is 5.8%, the highest of the seven candidates.

Fair value estimate of TD based on Non-GAAP EPS (source: Portfolio-Insight.com)

Fair value estimate of TD based on Non-GAAP EPS (source: Portfolio-Insight.com)

TD is trading just below its undervalue price of $66.68, confirming that now may be a good time to buy shares.

For investors looking for total return rather than dividend income, BLK, CME, and TROW have the highest 5-year DGRs and could perform well in the future should the companies continue their generous dividend increases. The trio have easily outperformed the rest of the candidates over the past 20 years:

Comparison of the total returns of the top-ranked Financials sector stocks over the past 20 years (source: Portfolio-Insight.com)

Comparison of the total returns of the top-ranked Financials sector stocks over the past 20 years (source: Portfolio-Insight.com)

CME tops the performance list, with total returns of 4,098% or an impressive 22.23% on an annualized basis! Unfortunately, CME is currently trading at a premium of 11%, so I’d wait for a better entry point before buying shares.

Likewise, BLK is is trading at a premium valuation. So, perhaps TROW should be the pick for investors looking for total returns at current price levels.

Concluding Remarks

This article presented the seven top-ranked dividend growth stocks in the Financials sector.

Four of the seven stocks are discounted, and TD and TROW appear to present the best opportunities for investors looking for strong dividend income and total returns, respectively. I’m intrigued by CME but would wait for a better entry point, somewhere below $190 per share.

Next time, we’ll look at the best Health Care sector stocks.

Thanks for reading!

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I’d be happy to answer any questions you may have!

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