Bank On Dividends With Bank ETFs

Financial services stocks and exchange-traded funds have disappointed in the wake of the Federal Reserve's December interest rate hike, the first such action by the U.S. central bank in nearly a decade.

For example, the Select Sector Financial Slct Str SPDR Fd XLF, the largest financial services ETF by assets, is down 12.4 percent over the past month and has closed higher in just two of 2016's 10 trading sessions.

Banks And Dividends

Patient investors could be rewarded with bank stocks and ETFs in the form of consistently rising dividends. The financial crisis undid decades' worth of dividend ebullience from big banks in short order, leaving some income investors scorned and doubting the sector's future dividend growth prospects.

Related Link: Meet 2015's Best Financial ETF

Fast-forward to 2015 and after several years of dividend stress tests, bank stocks are once again boosting payouts, bolstering the dividend allure of ETFs like XLF and the SPDR KBW Bank (ETF) KBE.

“According to SNL Financial, 13 banks have increased common dividends declared by 4 percent or more for six consecutive calendar years. While the 2008 financial crisis is far in the rearview mirror, banks in general do not provide the dividend growth records that can be found in consumer staples or industrials,” said S&P Capital IQ in a recent research note.

Dividend ETFs And Exposure To Financials

As S&P Capital IQ, some dividend ETFs still have relatively low weights to the financial services sector because those ETFs rely on dividend increase streaks as part of their weighting methodology. For example, the Vanguard Dividend Appreciation ETF VIG, the largest U.S. dividend ETF, mandates that its holdings have dividend increase streaks of at least 10 years.

As such, financials are just 6.2 percent of VIG's weight, trailing five other sectors.

The $2.36 billion KBE has a trailing 12-month dividend yield of 1.7 percent, but several of the equal-weight ETF's 62 holdings are boosting payouts. That includes Comerica Incorporated CMA and UMB Financial Corp UMBF.

“S&P Capital IQ Equity Analyst Erik Oja sees CMA as well-positioned, in the longer term, to grow lending in California (real estate), Michigan (autos) and in Texas (health care, partly offset by energy). Another small bank on SNL’s dividend growth list was Missouri based UMB Financial Corp (UMBF). The small-cap regional bank experienced 34 percent dividend growth during the last six years, ending 2015 with a $0.98 per share dividend; UMBF yields 2.3 percent and also has an A- Quality Ranking.”

No stock accounts for more than 2.65 percent of KBE's weight.

Disclosure: Todd Shriber owns shares of XLF.