Is Bank of America a Good Stock for Retirees?

By Markets Fool.com

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When you think about stocks that are good for retirees, you probably don't think about Bank of America (NYSE: BAC). But that doesn't mean shares of the nation's second biggest bank by assets don't have a place in a retiree's portfolio.

The main strike against Bank of America from a retiree's perspective is that it pays a small dividend. This matters because retirees typically need income from their investments to replace lost salaries.

This is where the dividend yield comes into play. It measures how much a stock pays out each year relative to how much its shares cost -- the bigger the yield, the bigger the dividend.

Bank of America's stock yields around 2%. That's slightly less than the average stock on the S&P 500, which yields 2.1%. And it's much less than other big bank stocks such as Wells Fargo, which yields 3.1%.

One of the reasons Bank of America's dividend is so low is that it slashed its quarterly payout to $0.01 a share during the financial crisis and has raised it only twice since then. Meanwhile, Wells Fargo, JPMorgan Chase, and others have boosted their dividends every year since 2011.

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The issue for Bank of America is that its earnings have been inconsistent, thanks to tens of billions of dollars' worth of legal expenses stemming from the crisis. On top of that, the Federal Reserve now has veto power over banks' capital plans, which has slowed the pace at which Bank of America can raise its dividend.

It's worth pointing out, too, that Bank of America's shares are more volatile than the average stock. This is another strike against it from the perspective of most retirees, who tend to value capital preservation more than younger investors.

You can see this by looking at Bank of America's beta, which measures the volatility of its stock on an ordinary day. Its beta is 1.7, according to Finviz.com. This means it's 70% more volatile than the broader market. On average, then, when stocks fall 1%, Bank of America is off 1.7%.

But even though these two strikes seem to disqualify Bank of America's stock from most retired investors' portfolios, there are instances in which even a retiree may want to hold the bank's stock. Specifically, if a retiree has plenty of income and is looking for a bank stock that offers decent upside potential, then Bank of America is one of the best bets among the nation's biggest banks.

Shares of the North Carolina-based bank trade for one of the lowest valuations in its industry. They're priced right now at a 35% discount to book value. Wells Fargo, by contrast, trades at a 37% premium to its book value.

You can see Bank of America's low valuation reflected in analysts' price targets. The consensus price target on its stock is 14% higher than today's price. The implied upside to most other bank stocks, by contrast, is less than 10%.

The net result is that Bank of America's stock may not be great for most retired investors who need income, but it could serve a purpose for retirees who are more interested in capital appreciation.

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John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.