Last year I sold some stock holdings and invested the proceeds in a basket of laddered CDs. The rate I got wasn't great but it was a lot better than it is now. Some of these instruments have matured and some brokerage CDs were called. Now it looks like any new purchases of CDs would result in a negative real rate of return. I say this because the rate paid by banks is much lower than the inflation rate, which results in a net loss. To make matters worse, the puny yield on the CD is taxable. So what is an investor to do? When looking at the issuers of the CDs, I can't help but notice that the stocks of these large money center banks are paying a dividend yield of 3-6%. They are also trading at an attractive multiple (PE ratio) that is lower than the overall market. The XLF which is an Exchange Traded Fund that tracks the Financial Industry has lost over 20% of its value so far this year while the S&P index has gained about 10% so far this year. A decent dividend yield and a beaten down stock price is just the kind of thing that interests me. Throughout this troubled year of pandemic, job losses, business shut downs, wildfires, hurricanes, political turmoil and 250,000 deaths, most banks managed to stay profitable. The stimulus package earlier this year helped because it allowed the unemployed make payments on their loans. Another stimulus package will also benefit banks and people who owe money to them. Banks also benefited from the PPP program because they made money on each loan application. I haven't forgotten that we are in a recession and the banks will most likely have record charge-offs on loans in the future, however, most banks are beefing up their allowance for loan losses in real time. There are many risks banks will face in the future but they are in the business of risk taking and will deal with anything that develops. The banking system is the backbone of our economy and I am confident that our government will not let it fail. In summary, if you don't like the rates banks are offering to depositors, buy the stock instead. Over time the dividend and the stock appreciation may produce out-sized returns.
