Earlier this week, I took the subway to Downtown Brooklyn in 19-degree weather to report for Jury Duty. New York has a very busy court system, so I wound up being interviewed for a jury within a couple hours of arriving. A lawyer asked a room full of us potential jurors several questions, to determine if we could be fair to both parties in the case. When he got to me, he looked at the juror information form he was holding and said: “So you write about investing for a living? Where should I invest my money?”
I wasn’t surprised: that’s usually the first thing people say when they find out what I do. But even though I’m used to the question, I usually don’t have a short answer for them. I read hundreds of stock recommendations a month, and we publish 30 different ideas in the Digests every week. Sometimes one idea sticks in my mind—often a company with an unusual new product, like SodaStream (SODA) or Crocs (CROX)—but more often, I don’t have a favorite idea on the tip of my tongue.
This time though, I was prepared. “Mexico,” I said.
The lawyer laughed, and asked why. I didn’t want to hold up proceedings by going into the details, so I just told him that a lot of advisors seemed to be recommending Mexican investments recently. But if you’ve been reading the Investment of the Week recently, you know why Mexico immediately came to mind: three of our Investment Digest contributors all picked the same Mexican ETF (the iShares MSCI Mexico Investable Market Index, symbol EWW) as their Top Pick for 2013 this year, as I wrote about here last week. Three separate bets on the same fund, out of the entire universe of investable securities, as a favorite pick for the coming year: that’s a pretty strong buy signal to me.
But I already wrote about EWW here—so why am I bringing it up again?
Well, today I’m going to do the same thing I did for the Investment Digest Top Picks for the Dividend Digest Top Picks: look at them all together and find the really big story that’s going to be the single best place to invest this year. But this time, for income.
The big story in the Investment Digest was pretty obvious: there was the EWW triple pick, and then several other bets on emerging market funds. Finding the biggest theme among the Dividend Digest Top Picks was a little trickier. For one thing, dividend-paying stocks are far more common in some industries than others, so the Dividend Digest Top Picks tend to include a lot of telecoms and energy companies, and not a lot of tech or medical stocks. But that’s not significant; it’s just a reflection of where the dividends are.
In addition, there weren’t a bunch of Top Picks of sector funds from the same industry or geographic area, like in Investment Digest. Multiple advisors picking similar funds, like they did in Investment Digest, means they’re all betting on the same broad theme for the coming year. But the Dividend Digest fund Top Picks were more diverse (although there were a few international, and particularly Asian, Income and Bond funds, reflecting the emerging markets theme again.)
So I had to look for a theme among the individual stocks chosen as Top Picks.
And that’s where I found our top income investing idea for 2013: undervalued dividend-paying bank stocks.
As with EWW, this theme is anchored by a Top Pick chosen by more than one advisor. In this case it was M&T Bank Corp. (MTB), a medium-sized regional bank with a $2.80 dividend (for a current yield of about 2.7%). Bernie Schaeffer, Editor of Schaeffer’s Investment Research, was one of the advisors who chose MTB as his Top Pick. He wrote, in part:
“Regional lender M&T Bank has been a technical standout, handily outperforming the benchmark S&P 500 Index with its gain of roughly 29% over the past 52 weeks. It is our top conservative pick for 2013. The stock is now establishing a foothold above former resistance in the $96-$98 area, but Wall Street remains almost unanimously bearish toward MTB.
“During the last 20-day and 50-day periods, there have been more puts than calls bought to open on the bank stock. … Likewise, short sellers have ramped up their bearish exposure to MTB by 67% during the past four months. Shorted shares now account for more than 6% of the equity’s float. Finally, 13 out of 19 analysts maintain a downbeat ‘hold’ rating on MTB, despite its impressive technical performance. As this legion of skeptics is forced to admit defeat, an unwinding of bearish sentiment could be a boon for MTB going forward.” – Bernie Schaeffer, Schaeffer’s Investment Research, January 2013
As you can see, contrarianism played an important role in Schaeffer’s recommendation. Financial stocks have been recovering ever since the bottom of the financial crisis, but they’re still unloved by most investors.
The second MTB recommendation came from Jack Adamo, Editor of Insiders Plus, who participated in our Top Picks as a contributor to TheStockAdvisors.com. His recommendation focused more on the positive qualities of MTB, and specifically its resilience in the face of the financial crisis and resulting stronger position than other banks. Here’s some of what he wrote:
“Our top pick for more conservative investors is a stock everyone can feel safe about owning, without sacrificing above-market returns and a steady, substantial dividend. M&T Bank is a financial holding company headquartered in Buffalo, New York. M&T has been profitable in each and every quarter for the last 37 years. It is the only major American bank that didn’t cut its dividend in 2008-2009.
“Dividend growth has been nil since 2007 while it integrated acquisitions of banks it bought at fire sale prices during the banking crisis, but for the prior five years, dividend growth was a spectacular 22.9% per annum, compounded. Third quarter earnings clearly showed the benefits of the acquisitions, so I don’t mind the temporary stall in dividend growth. … Super bank analyst Meredith Whitney and Bloomberg economist Tom Keene both say that M&T is the best-run large American bank. I agree. M&T Bank Corp. is a buy up to $104.” – Jack Adamo, Insiders Plus, January 2013
Of course, MTB isn’t the only reason I’m picking bank stocks as the number one income investment for 2013. Other contributors chose Wells Fargo & Company (WFC, 2.8% yield), Swedish Nordea Bank AB (NRBAY, 2.7% yield), C&F Financial Corp. (CFFI, 2.8% yield) and Bank of Montreal (BMO, 4.5% yield) as their Top Picks for 2013.
And bank stocks were popular among the Investment Digest Top Picks too! There we had Bank of America Corp. (BAC), Great Southern Bancorp (GSBC, yield 2.8%) and the iShares MSCI Europe Financial Sector Index Fund (EUFN, yields 2.8%). Because it’s still under the oversight of the Federal government, BAC doesn’t pay much of a dividend yet, but the recovering mega-bank is expected to be allowed to hike its payout soon.
Like the financial sector overall, every one of the bank stocks chosen is still in recovery mode from the financial crisis. But the advisors who recommended them point to improving metrics, like growing deposit bases, improving loan books and growing dividends as signs that investors will love these banks again someday soon. Some of the banks are in better shape than others: Great Southern, C&F and M&T were more conservative to begin with, so they’ve had a head start over megabanks like Bank of America that got really caught up in the subprime crisis. But the banks that fell furthest will have the most dramatic recoveries.
Finally, I can’t close without drawing a parallel to the housing industry, which was the source of some of last year’s best-performing Top Picks. Like housing, the financial sector was so thoroughly trounced in 2008 that its recovery means huge moves upward for many stocks. And that can mean huge profits for courageous investors who can put more weight on the potential of tomorrow than the baggage of yesterday.
Wishing you success in your investing and beyond,
Editor of Investment of the Week
P.S. Last week we released our Dick Davis Dividend Digest Top Dividend Picks for 2013!
But it’s not too late for you to profit from the recommendations. Check out some of the huge gains our subscribers earned from last year’s Top Picks issue:
-Marathon Petroleum (MPC): Total return of 93% (Yield 3.77%)
-RBS preferred ‘F’ series (RBS-F): Total return of 40% (Yield 10%)
-Hambrecht & Quist Life Sciences Fund (HQL): Total return of 30% (Yield 8.35%)
-McCormick (MKC): Total return of 30% (Yield 2.6%)
-C & F Financial Corp (CFFI): Total return of 24% (Yield 3.3%)
And there’s plenty more where they came from! For details on best dividend-paying stocks, click here.