Yahoo Finance

Following the successful annual check-up of the health of the big 31 banks in the stress test by the Fed last week, 28 banks received approval for raising dividends and share buybacks. According to most analysts, U.S. banks will likely boost quarterly payouts by an average of 53% over the next 15 months.  

In fact, the banks could regain their position as one of the largest dividend paying S&P 500 sectors, which they lost over the past six stressful years. According to the latest data from S&P Dow Jones Indices, banks in the blue-chip index are on track to pay $54.5 billion in dividends over the course of one year, trailing the information technology sector by $927 million. Considering this, dividends from the financial sector would account for 14.6% of the total versus 14.9% for technology (see: all the Financial ETFs here).

Bank Dividends in Focus

Among the biggies, Citigroup (C), Morgan Stanley (MS), Wells Fargo (WFC), Goldman Sachs (GS), and JPMorgan (JPM)  will likely raise dividends by 400%, 7%, 7%, 8%, and 10%, respectively. Notably, Citigroup will boost dividends for the first time in seven years.

Some of the other major banks such as State Street (STT), American Express (AXP), and BB&T Corp (BBT) are expected to increase quarterly dividends in the range of 11.5–13.5% while dividends of U.S. Bancorp (USB), PNC Financial Services Group (PNC), and Comerica Inc. (CMA) are expected to rise in the range of 4–6%. Meanwhile, Discover Financial (DFS) and Suntrust (STI) would see higher dividend growth of 16.7% and 20%, respectively.

Solid Fundamentals

With the economy gaining strong momentum, the Fed is on track to raise interest rates sometime in the middle of the year. And, of course, financial entities like banks, insurance companies and discount broker sites will be the biggest beneficiaries of a rising rate scenario, as a steeper yield curve will assist banking institutions in making more money from a bigger spread between short-term rates for deposits and longer-term rates for loans (read: Financial ETFs in Focus on Rising Rates Buzz).

Further, a healthy job market, growing manufacturing and service sectors, renewed housing recovery and rising consumer confidence are leading to higher demand for all types of financial services.  This has spread optimism in the overall sector.

ETFs to Consider

Given juicy dividends and a bright outlook, financial ETFs are poised to outperform in the coming months and investors should not lose this opportunity to earn exciting returns. We have highlighted three funds that could make for a compelling play – these have a favorable Zacks Rank of 2 (Buy) or 3 (Hold) but with a High risk outlook.

SPDR S&P Bank ETF (KBE)

This fund tracks the S&P Banks Select Industry Index and has an AUM of $2.5 billion. Volume is good as it exchanges more than 1.4 million shares a day while the expense ratio is at 0.35%. The product holds a diversified basket of 64 stocks with none holding more than 1.82% of total assets (read: 4 Sector ETFs to Watch for Gains in 2015).

From a sector look, about three-fourths of the portfolio is allotted to regional banks while thrifts & mortgage finance, diversified banks, asset management & custody banks and other diversified financial services take the remainder. KBE currently has a dividend yield of 1.57%. The ETF has added 1.1% in the year-to-date time frame and has a Zacks ETF Rank of 3.

iShares U.S. Financial Services ETF (IYG)

This product follows the Dow Jones U.S. Financial Services Index, holding 112 stocks in its basket. It is highly concentrated in the top two firms – WFC and JPM - making up for over one-fifth of the portfolio. Other firms hold less than 7.7% share. Banks dominate the fund’s portfolio at 55% while financial services make up for the remainder.

The fund has amassed $590.6 million in its asset base and sees moderate average daily volume of over 55,000 shares. It charges a slightly higher fee of 43 bps from investors. The product lost 0.24% so far in the year and currently pays 1.15% in annual dividends. IYG has a Zacks ETF Rank of 2.

Financial Select Sector SPDR Fund (XLF)

The most popular financial ETF on the market, XLF follows the S&P Financial Select Sector Index. This fund manages about $18.8 billion in assets and trades in heavy volume of roughly 36.6 million shares a day. The ETF charges 15 bps in fees per year from investors. In total, the fund holds about 87 securities in its basket with the top five firms accounting for 36.2% share. Other firms hold less than 2.7% of assets (read: Earnings Recap for Financial Sector and Impact on ETFs).

In terms of industrial exposure, the product is tilted toward bank at 36.2% while insurance, REITs, capital markets and diversified financial services account for double-digit allocation each. The fund currently yields 1.63% in annual dividend and has lost 1.7% so far this year. The ETF has a Zacks ETF Rank of 2.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
SPDR-KBW BANK (KBE): ETF Research Reports
 
ISHARS-US FN SV (IYG): ETF Research Reports
 
SPDR-FINL SELS (XLF): ETF Research Reports
 
CITIGROUP INC (C): Free Stock Analysis Report
 
MORGAN STANLEY (MS): Free Stock Analysis Report
 
GOLDMAN SACHS (GS): Free Stock Analysis Report
 
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
 
JPMORGAN CHASE (JPM): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research
 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report