Investing in Bank Stocks (Part Two)

(1) Dividend Yields: Dividend yields are tricky because a stock which nosedives will suddenly have an attractive dividend yield, while a runup in a bank stock's price will depress the dividend yield. As a general rule and treating the bank stock like an income-producing security the dividend yield of a bank stock should be higher than the return on U.S. Treasuries to compensate for the additional risk. Today that means a bank yield of 4.50% or higher. Banks are generous with dividends and it is quite easy to find solid earnings-rich banks paying dividends yielding between 4.50% and 6.50%. Any dividend yield of over 6.50% needs to analyzed carefully to understand the history of the payout and stock price and financial strength of the bank.

(2) Price-to-Book Ratio: Banks in general boost attractive price-to-book ratios, but anything below 1.75% is especially attractive and indicative of strong financial health.

(3) Dividend Ratio: Bank which are likely to lower dividend payouts typically are the banks with dividend ratios (dividend payout /earnings) of 90% or higher. While, this is not a hard-and-fast rule by any means, banks paying out more than 90% of their earnings in dividends is a typically a short-time phenomenom followed by a dividend cut which ultimately reduces the investor's total return.

(4) 52-Week High / 52-Week Low: The trend can be your friend. Watching where the stock is trading in relation to its 52-week and 52-week low may lead to a momentum analysis on the stock's direction especially with the uncertainty of the exposure of bank's to shaky loan portfolio's. Watching insider trading as well on a stock is recommended

(5) Total Equity to Total Assets

The higher the percentage of equity to assets indicates a stronger balance sheet...more capital to deploy for growth/return to shareholders, or to cover potential bad loans

(6) Non-Performing Assets

The lower the percentage of non-performing assets the more profitable the bank will be. Non-performing assets is a synonym for bad loans. The increase in mortgage delinquencies makes this an important barometer and typically a ratio of below 1.50% is excellent.