Small Bank Stocks With Big Yields

From Kiplinger.com

Dividend-paying stocks are enjoying a revival, partly because dividend checks are real but earnings can be unreliable and controversial (think Enron). While many utilities and industrial companies have de-emphasized cash dividends, one successful group of stocks has stayed resolute in increasing its quarterly payouts to keep the yield high -- the shares of small banks.

That's small, as in checking and savings accounts, business lending and mortgages at just a few branches around town.

Money from the bank

In fact, banks dominate a screen of stocks with the fastest annualized dividend growth since 1998.

Some of the small bank stocks with the strongest five-year dividend growth include Alliance Bancorp of New England (ANE), Georgia Financial (GBFP), Main Street Banks (MSBK), First Financial of Rhode Island (FTFN) and, skipping a few, the irresistibly named Crazy Woman Creek Bancorp (CRZY).

All of these, and plenty of others like them, have raised their dividends more than 40% over the past five years. The yields run from 2.5% to above 4%.

Besides the income, the stocks themselves have done well: Alliance of New England returned 37% in 2001; Main Street Banks (of Georgia), 35%; Georgia Financial, 31%; and Crazy Woman Creek, named for a stream in its home county in Wyoming, 24%.

I didn't forget First Financial of Rhode Island. This gem from Providence, one of my favorite U.S. cities by a wide margin, gained 181% in 2001 and even so retains an above-average dividend yield. However, it has agreed to be bought by another Rhode Island bank.

Why so generous?

Okay, you may be asking, with growth like that, why do small bank stocks pay robust dividends? One reason is that controlling families often closely hold the shares. They may not pay themselves to run bank operations, or they take modest salaries, and collect the serious income in dividends.

Also, it makes sense to pay out the dividends to boost return on capital. If the bank keeps the money paid in dividends as excess capital, its profits produce a lower return on that capital. A good dividend can make the bank's return stack up better against the competition, by some measuring tools.

Buying tips

Interested? Douglas Hughes, publisher of Small Bank Newsletter, offers several tips:

Buy several of these stocks to raise the odds that at some point you'll run into a generous acquisition.

Look for banks in thriving geographical areas, since local growth and banks' fortunes are related.

Be patient. Because many small banks are closely held, there's not much chance the bank will be sold unless a couple of key people get their price. But the ownership will pass along a share of the profits and do what they can to see that the stock rises.

In general, small banks' shares aren't cheap now, just reasonably valued. They were depressed about three years ago during the tech-stock boom, when the idea of buying shares in a small bank sounded incredibly dull.

But if you look at Hughes' newsletter (recent sample newsletters are available online), or at the holdings of a good specialized closed-end fund like First Financial Fund (FF), there are still plenty of ideas. Heck, the place you deposit your paycheck every two weeks might be the best investment around.

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