High-Yielding Financial Stocks Just Went on Sale, KBW Says -- Barron's Blog

       

By Chris Dieterich
        It's been a rough ride for stocks that pay big dividends in recent months, as investors digest the probability that the Federal Reserve will finally pull the trigger and raise interest rates later this year.
        Keefe, Bruyette & Woods this week notes the recent dichotomy between the performance dividend payers and non-dividend payers in the financial sector.
        In one corner are banks, which are likely to benefit from higher interest rates: low rates has crimped profits for lenders, which make money on the difference between what they pay depositors and what they charge for loans. Higher interest rates should lead to higher profitability. Mister Market has rewarded bank stocks and exchange-traded funds, with the SPDR S&P Bank ETF ( KBE) and SPDR S&P Regional Banking ( KRE) besting the SPDR S&P 500 ( SPY) since March, and the broader Financial Select Sector SPDR ( XLF) since May.
        In the other corner of the financial sector are real estate and business development companies, which have slumped; the Vanguard REIT ETF ( VNQ) and Market Vectors BDC Income ETF ( BIZD) are slightly negative and down 7.8% over the past three months:
        "While financial stocks have rallied nicely since April, the highest yielding stocks in financials--residential and commercial mortgage REITs and BDCs--have been hammered. The prospect of the Fed raising rates 'sometime this year' appears to have spooked investors in the high yield segment. Yet the Fed has also signaled that rate increases will be very slow, and many of the hard-hit stocks yield more than 8% and have limited credit risk.
        But KBW thinks that recent selling may have already crescendoed, noting that historically, the performance of high-yielding financial stocks doesn't have a strong relationship with the 10-year yield.
        "We are perplexed by the concerns about the impact of a 25-basis-point increase in interest rates on these stocks.
        "We believe that value-oriented investors who don't believe that interest rates will increase rapidly should look carefully at this group of stocks now, while they are on sale."
        In BDCs, KBW's analysts like BlackRock Capital Investment ( BKCC), Ares Capital ( ARCC) and Apollo Investment ( AINV). In commercial and single-family REITs, their picks include Ladder Capital ( LADR), Blackstone Mortgage Trust ( BXMT), Colony Capital ( CLNY) and iStar Financial ( STAR). Among residential mortgage REITs, KBW likes Invesco Mortgage Capital ( IVR) and Two Harbors Investment ( TWO).
        (END) Dow Jones Newswires

        August 04, 2015 10:57 ET (14:57 GMT)

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