The last few months have not exactly been kind to bank stocks. Sub-prime mortgage losses have hammered banks that made such loans, and even brought down banks with no direct exposure. Analyst downgrades and investor pessimism have been the rule.

While the past week has brought a small reprieve with rumors of another Fed rate cut on the way, many banks are still hovering near their 52 week (or longer) lows. While analysts are mostly saying “sell” or “hold”, I am looking to buy.

Why?

In a word - dividends. Banks tend to have high dividends, and plunging stock prices have pushed yields to almost ridiculous levels. Citigroup is currently yielding over 6%. Bank of America - 5.6%, Wachovia - 5.8%, US Bank - 4.8%, Key Corp - 5.7%.

Slightly smaller; National City - 8.3%, Huntington Bank - 6.5%, or if you feel brave, Washington Mutual currently is yielding 11.7% with most people betting that the dividend will be cut next quarter.

With large established banks like this paying 6-8%, it really is a tempting situation. Of course, as with any stock, the price can continue to go down, particularly if more losses show up at that bank. But on the other hand, with prices so far depressed compared to historic levels and the risk of total default so low (do you really think Citigroup will fail?) the upside just in terms of income seems pretty solid. There is also risk of dividends being cut (like WaMu is widely expected to do), but companies generally avoid this if possible, because it is a big signal of financial weakness.

Bottom line: do your homework, but as an income play, banks are worth a look!

Disclaimer: I am not a financial advisor, and I don’t recommend any particular stocks or investment strategy. The above is just my own thoughts and speculation.

Edit 12/11/07: And as expected Washington Mutual has slashed its dividend (by 70%!) Cross that one off the list…

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Old and Busted: Savings bond

When it comes to gifts, one that nearly everyone has received at some point is the US Savings bond. They are easy to buy and people think of them as a good “investment for the future” compared to a check.

But people are wrong.

EE Bonds sold between November 2007 and April 2008 will pay a fixed 3% interest rate. That’s hardly keeping up with inflation, much less increasing in value! Additionally, cashing the bonds in the first 5 years costs three months interest as a penalty, and the bonds won’t reach face value for 20 years!

Obviously, from a financial standpoint savings bonds don’t make much sense (or cents). But other than a check, what is a fiscally minded giver to do?

New Hotness: Shares of Stock!

Forget about savings bonds and 3% returns, consider giving shares of stock instead! Giving shares is a better option for several reasons:

• Greater growth potential. Since 1926, the average total return for the S&P 500 in a 20 year period (the time it takes a bond to mature) is almost 406%, compared to 100% for a savings bond. (Source)
• Multiple ways to grow. With a stock, you can make money through share price increases and dividends, and stock splits can compound your gains (resulting in the higher returns above.)
• Increase financial knowledge. Perhaps the biggest benefit of giving stock, particularly to young people, is that it can increase their interest in investing. Talking about money is one thing, actually owning a piece of Disney or Coke is much more interesting!

Is There a Catch?

Obviously, the return on a stock is not guaranteed like a savings bond. The figures above are based on the S&P 500 index as a whole, the performance of an individual stock may be less, or even nothing if the company goes out of business.

You can reduce the risk by buying only big blue chip companies. The risk of Disney going out of business is pretty small (though not zero)! Another way to reduce risk, though maybe at the expense of “coolness”, is to give shares of an exchange traded fund (ETF). ETF’s are basically mutual funds that trade like stocks, so you can diversify and reduce risks.

So this Christmas, ditch the bonds and give something that will really appreciate (and be appreciated.) Stocks in everyone’s stockings! 

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