Bank Stocks – High Risk and Erratic Dividends Symptoms of Long Term Problems in Banking System

Bank Stocks

Bank stocks are no longer investments for “widows and orphans”, but are instead, high risk investments with erratic dividends. Their volatility and undependable dividend payouts are symptoms of long term problems for the banking system.

In our last post we looked at why investors should Avoid Value ETFs and Mutual Funds. I pointed out that value ETFs and mutual funds are loaded with financial services stocks that used to be safe dividend paying stocks but are now high risk investments.

Bank stocks are large percentages of many value stock portfolios; and are being considered for purchase by individual investors because they can be bought for a fraction of the price they traded for a few years ago. I have avoided bank stocks for many years and, after careful examination, will not be adding any now either. Here is my analysis.

We know that most bank stocks have been volatile and poor investments the last few years. I’m not saying these investments won’t have periods in which they do well. If a stock falls from $50 to $2 and then rises to $4; I realize if you buy at $2 you have a 100% gain. My point is you need to realize what you are buying. Are you looking for a trading opportunity or a long term investment? While banks stocks used to provide security, dividend income, and moderate consistent growth; there are plenty of reasons to believe those days are over.

Long Term Problems for Bank Stocks

Let’s look at the long term problems of the banking system that make bank stocks high risk investments for the foreseeable future:

Political Risks – Everyone hates the banks right now

Failing Mortgages – Still millions of underwater mortgages on the books (and more coming!).

Deflation – Housing prices are still falling!

 

Litigation and Settlement costs over mortgage putbacks.

Regulatory reforms adding costs and making loans harder to make.

Exposure to Europe.

Lack of Transparency – What exposure do they have to derivatives?

When Interest Rates Rise – Banks are getting a free bailout from the Federal Reserve artificially holding down rates. What happens when rates rise?

Balance Sheets need improvement as requirements for additional capital make lending harder and less profitable.

Lack of Credit Growth – Banks have thrived for decades on ever expanding credit. Credit is shrinking now.

Does This Mean You Shouldn’t Buy Bank Stocks?

The point of this post is not to keep you from buying bank stocks. Everyone has their own personal risk parameters. There may be a price where it’s worth the risk to own a particular stock. The point of this article is that bank stocks are a completely different investment from what they were in the past. They are no longer steady dividend investments for “widows and orphans”.

Bank stocks are high risk investments with erratic dividends because the banking system environment has changed. Be sure you understand the risks, and possible rewards, before making an investment.