Passive income is a great way to grow your money. One of the best ways to generate passive income is to invest in companies that regularly pay dividends.
Dividend-paying companies tend to be higher quality with stronger balance sheets, which is why they can deliver exceptional long-term returns regardless of the market cycle. The banking industry is an industry with consistent dividend payers that could benefit from rising interest rates. Here are three such bank stocks that could be passive income stars.
1. United Bankshares: 48 years of growing dividends
United Bankshares (UBSI -0.25%) provides banking services to customers in the Mid-Atlantic region of the United States, with branches in West Virginia, Virginia, Washington, DC, Ohio, Pennsylvania, Maryland and parts of the Carolinas.
The bank has masterfully grown its business through acquisitions, acquiring 33 smaller regional banks since 1982. This growth-by-acquisition strategy has paid off for investors, who have seen their dividend payouts increase for 48 consecutive years.
United Bankshares has also done a solid job of controlling its expenses, as evidenced by its efficiency ratio. The efficiency ratio measures expenses (excluding interest) divided by revenue, with a lower ratio indicating that a bank is operating efficiently. In the first quarter, the bank’s efficiency ratio was 59%, below the industry average of 62%, according to S&P Global Intelligence.
The bank should also benefit from rising interest rates. This is because they traditionally earn money on the difference between interest paid on deposits and interest earned on loans, called net interest income (NII). The bank forecast the NII could rise 8% to 10% in April – before the Federal Reserve raised the federal funds rate by 75 basis points in June, the biggest rate hike since 1994.
United Bankshares offers investors a strong dividend yield of 4.2%, and its consistent history of increasing dividend payouts makes it an excellent bank stock for a lifetime of passive income.
2. Commerce Bancshares: Increased its dividend for 54 consecutive years
Bancshares Trading (CBSH -0.35%) provides banking services in 152 branches in Colorado, Illinois, Kansas, Oklahoma and Missouri. The regional bank has been in business for more than 150 years and is the 38th largest bank in the United States by total assets.
Commerce Bancshares does an excellent job of managing risk and offers industry-leading returns. A measure of risk in banking is the Tier 1 risk-based common capital ratio, which tells you how well capitalized a bank is in the face of a downturn in the economy. Commerce Bancshares’ ratio is 13.9%, the third highest among the 50 largest banks based on asset size. With 68% of economists forecasting a recession in 2023, Commerce Bancshares is in an excellent position to weather any potential economic storm on the horizon.
Return on average equity is another measure used by banks to show how efficiently banks generate profits and the likelihood of a bank paying dividends. Commerce Bancshares has offered investors an average return on equity of 12.4% over the past 15 years, beating the average of its peers by 8.3%.
The bank currently returns investors 1.56% and has increased its dividend for 54 consecutive years, making it another great bank stock for a lifetime of passive income.
3. Bank OZK: Increase in its dividend for 48 quarters in a row
OZK Bank (OZK 0.70%) provides banking services in 240 offices in Arkansas, Georgia, Florida, North Carolina, Texas, California, New York and Mississippi.
This bank is attractive because it is highly dependent on net interest income and is particularly sensitive to rising interest rates. In the first quarter, the bank earned net interest income of nearly $250 million, an increase of 6.3% over the previous year.
According to its regulatory filing ending March 31, a 2% increase in interest rates would increase its NII by 7.3%, and a 3% increase in rates would cause its NII to increase by almost 12%. Keep in mind that the Federal Reserve has raised the federal funds rate, its benchmark lending rate, by 1.5% since that filing and is expected to raise rates another 0.75% at its meeting at the end of this filing. of this month.
OZK Bank offers investors a strong dividend yield of 3.3% and has increased its dividend for 48 consecutive quarters, making it another great stock to hold for a steady stream of passive income.