This Dividend Stock Is a No-Brainer for Bear Market Growth

The bear market left many investors looking for a safe place to park some of their portfolio cash. For many, that led them to invest in dividend stocks, which provide income or cash that can be reinvested in stocks to boost total return. In a market where indices focused on growth stocks like the Nasdaq Composite are down almost 25% in 2022 and the S&P 500 has dropped by 16.4%, any extra income or profitability is appreciated.

The market will eventually recover, but with valuations still high among growth stocks, it is not yet clear if the market has bottomed. If you want to add some balance to your portfolio to offset some of the losses with a stock that produces solid dividends, consider financial regions (RF -2.81%).

Why Regions Financial is beating the market

Regions Financial, headquartered in Birmingham, Alabama, is the holding company for Regions Bank, serving clients in 16 states in the South and Midwest. As of June 30, it is the 25th largest bank in the US, with $160 billion in assets under management.

Banks can be something of a safe haven for investors during a bear market, as they typically pay solid dividends. They also tend to outperform most industries in a high rate environment. The banks that perform best are those that focus on basic banking functions like loans and deposits. It is the larger banks that also rely heavily on investment banking, institutional trading, asset management, and other activities that tend to take a hit in bear markets. While larger diversified banks often outperform good economies, smaller banks tend to do better in bear markets, especially those where interest rates are rising.

That has certainly been the case for Regions Bank, which generated about 65% of its $1.75 billion in revenue in the second quarter in interest income. JPMorgan Chasethe largest bank in the US, got about 49.5% of its income from interest income in the second quarter.

Regions generated $1.75 billion in revenue in the second quarter, up 10.5% from the prior year, driven by a 15.1% increase in net interest income. Additionally, revenue increased 9.3% from the first quarter as net interest income increased 9.2% from the previous quarter.

The higher interest income came from an increase in the prime interest rate, which went from 0% to 0.25% at the beginning of the year to the current level of 2.25% to 2.50%. It is likely to rise another 75 basis points in September and should continue to rise into next year as the Federal Reserve Board tries to get inflation back to historical levels.

A solid dividend and an annual return of 12.3%

What helped Regions increase revenue this year isn’t just higher interest rates. Lending activity remains strong as total loans increased 7.3% year-on-year in the second quarter and 3.4% in the first quarter. An economic slowdown could weigh on loan growth in the next two quarters, but that loss will be offset by higher interest income from higher rates.

So in a market where the S&P 500 is down 16.4% year-to-date, the KBW Bank Index is down 18.1%, and the Nasdaq is down 24.7%, Regions is up 0.4% year-to-date and 12.3% in the last year to September 13.

In addition, Regions’ dividend has increased annually for the past 10 consecutive years. This quarter, Regions increased its dividend by 17% to $0.20 per share and now generates a return of 3.58%, which is better than the banking industry average of 3.18%. Regions generates enough free cash flow to set the payout ratio at a low and very manageable 22.73%, which means plenty of earning power to continue to grow the dividend in the future.

The stock’s valuation is cheap right now, with a forward price-to-earnings ratio of 9.1. Given the uncertainty ahead, Regions looks like a good buy for investors looking for dividend income and strong yields in a rising rate environment.

JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. David Kovaleski has no position in any of the mentioned stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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