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If you're like most investors, then you appreciate the power of dividends. Not only do they pad your pocket on a quarterly basis, but companies that pay dividends tend to outperform those that don't.
Given this, I ran a screen to see which bank stocks -- the sector I cover -- have the highest yields. Five stuck out from the rest, as each of their stocks yielded more than 3%, which comfortably exceeds the average 2.1% yield on the S&P 500.
Data source: YCharts.com.
Just because these five stocks have the highest yields among big banks doesn't mean that you should rush out and buy them. Of the group, Wells Fargo (NYSE: WFC) is the only one that strikes me as a conservative long-term investment.
The California-based bank leads its peer group when it comes to profitability. Over the past 12 months, it generated a 13% return on equity. Only U.S. Bancorp beat it, with a 14.4% return on equity.
And Wells Fargo's performance over the past year isn't an aberration, as it's one of the most consistent performers in the industry. This is underscored by the fact that the $1.9 trillion bank didn't report an annual loss throughout the entire financial crisis, which was the worst economic downturn since the Great Depression.
The other banks on the list, meanwhile, face unique challenges that dim their prospects vis--vis Wells Fargo.
- New York Community Bancorp (NYSE: NYCB) is in the midst of a substantive transition. Its recent acquisition of Astoria Financial pushed the New York-based bank over the $50 billion mark in terms of the assets on its balance sheet. This means that it's now subject to the Federal Reserve's veto over bank capital plans, which explains why New York Community Bancorp is more likely to lower its dividend going forward than to raise it.
- People's United Financial(NASDAQ: PBCT) is dealing with pressure from all angles. The ratings agency Moody's lowered the bank's debt rating because of "below-average capital ratios" and "constrained profitability." This led analysts to downgrade its stock, which in turn whet the palate of short sellers. It's currently the most heavily shorted big bank stock, with 14% of its outstanding shares sold short, according to YCharts.com.
- KeyCorp (NYSE: KEY) is in the midst of swallowing its own acquisition after announcing a merger with First Niagara Financial Group last year -- the deal closed on Aug. 1. This will increase KeyCorp's size by 40% and present a host of challenges integrating the systems of two regional banks.
- Finally, Cullen/Frost Bankers (NYSE: CFR) is an energy-focused bank in Texas, which is about the last place you want to be, given the decline in oil and natural gas prices over the past two years. The trend has fueled loan losses from energy companies who can no longer service their debts because of the price drop.
The point is that the dividend yield, while important, is only the first step in one's hunt for great income stocks. You also need to have at least a sense for the underlying storyline of any company you invest in.
That said, in this case, if its high yield helps to seal the deal between you and shares of Wells Fargo, then I could imagine a worse outcome.
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John Maxfield owns shares of US Bancorp and Wells Fargo. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool recommends Cullen/Frost Bankers and Moody's. 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.