The best bank stocks all trade on a major U.S. stock exchange and meet the following criteria as of September 2023:
- Consensus analyst recommendation of “buy” or better. A high number of analyst “buy” ratings indicates an expectation the stock will outperform the overall market.
- Market capitalization of at least $10 billion. If a company has a leading market share and competitive advantages in a sizable industry, it will have a market cap greater than $10 billion. Small- and mid-cap stocks are generally more volatile, have a higher degree of uncertainty and risk associated with their business outlooks, and do not get as much media and analyst coverage.
- Forward earnings multiple less than 10. One of the most common and basic measures of shareholder value is how much profit a company earns per share of stock. Stocks with forward earnings multiples under 10 have extremely attractive valuations relative to the overall S&P 500 and are positioned to outperform during a cyclical economic downturn.
- Dividend yield of at least 2%. Not only does a dividend provide a consistent source of income for investors, but it is also a sign a company’s management is confident about its financial situation. When a company runs into liquidity problems or experiences financial stress, one of the first lines of defense is typically cutting or eliminating its dividend.
Why other stocks didn’t make the cut
In early 2023, investors got a wake-up call about how dangerous it can be to invest in bank stocks. Roughly 15 years after toxic bank assets nearly collapsed the entire U.S. financial system, plummeting bond portfolio values, exposure to cryptocurrency and fears over deposit runs triggered massive sell-offs in several U.S. regional bank stocks in March 2023.
The crisis ultimately led to the collapse of a handful of U.S. regional banks, underscoring the importance of selecting bank stocks with solid balance sheets, strong risk management, sizable profits and attractive valuations.
Bank stocks with healthy underlying business fundamentals also typically pay generous dividends, so there’s no reason for bank investors to settle for a yield of under 2%.
