Financial stocks are extremely oversold, with the XLF, the financial sector ETF, down 5.70% year-to date. This follows a period of aggressive selling that was driven by interest-rate volatility, recession fears, and lingering concerns about credit quality. Many banks, insurers, and asset managers are now trading at valuations well below historical averages on metrics such as price-to-book and forward earnings, even though balance sheets and capital ratios remain relatively strong relative to past downturns. This disconnect suggests the sector may be pricing in a worst-case scenario that has not materialized, creating potential opportunities for investors who believe economic conditions will stabilize. When sentiment is this negative while fundamentals remain solid, financials have historically been positioned for sharp rebounds once market confidence returns.
Given the persistent selling in the financial sector, we screened our 24/7 Wall St. financial sector research database for companies with the strongest metrics and the highest dividend yields. Five of our favorite stocks in the sector, including some stars in the regional bank arena, and the largest business development company, all make sense for growth and income investors looking to take advantage of the selling in some of Wall Street’s top companies. All five are rated Buy at top Wall Street firms that we cover.
Why do we cover financial sector dividend stocks?
Since 1926, dividends have accounted for approximately 32% of the S&P 500’s total return, while capital appreciation has accounted for 68%. Therefore, sustainable dividend income and the potential for capital appreciation are essential to total return expectations. A study by Hartford Funds, in collaboration with Ned Davis Research, found that dividend stocks delivered an annualized return of 9.18% over the 50 years from 1973 to 2023. Over the same timeline, this was more than double the annualized return for non-payers (3.95%).
Ares Capital
The company specializes in providing financing solutions for the middle market and appears poised to reach new highs, garnering a Buy rating from 12 analysts and yielding a 9.94% dividend. Ares Capital Corp. (NASDAQ: ARCC | ARCC Price Prediction) is a high-yielding business development company (BDC) that specializes in acquisitions, recapitalizations, mezzanine debt, restructurings, rescue financing, and leveraged buyout transactions for middle-market companies.
It also makes growth capital and general refinancing. It prefers to invest in companies in basic and growth manufacturing, business services, consumer products, healthcare products and services, and information technology.
The fund will also consider investments in industries such as:
- Restaurants
- Retail
- Oil and gas
- Technology
It focuses on investments in the Northeast, Mid-Atlantic, Southeast, and Southwest regions from its New York office; the Midwest region from its Chicago office; and the Western region from its Los Angeles office.
The fund typically invests between $20 million and $200 million, with a maximum of $400 million, in companies with EBITDA between $10 million and $250 million annually. It makes debt investments between $10 million and $100 million
The fund invests through:
- Revolvers
- First-lien loans
- Warrants
- Unitranche structures
- Second-lien loans
- Mezzanine debt
- Private high yield
- Junior Capital
- Subordinated debt
- Non-control preferred and common equity
The fund also selectively considers third-party-led senior and subordinated debt financings and opportunistically acquires stressed and discounted debt positions.
Ares Capital prefers to act as an agent and lead transactions in which it invests. The fund also seeks board representation in its portfolio companies.
Royal Bank of Canada has an Outperform rating with a $22 price target.
Fifth Third Bancorp
This top regional bank offers a solid 2.90% dividend and recently finished a purchase of Comerica. Fifth Third Bancorp (NASDAQ: FITB) is a diversified financial services company and is the indirect holding company of Fifth Third Bank, National Association.
Its Commercial Banking segment offers credit intermediation, cash management, and financial services to large and middle-market businesses, as well as to government and professional customers.
The Consumer and Small Business Banking segment provides a full range of deposit and loan products to individuals and small businesses through a network of full-service banking centers and relationships with indirect and correspondent loan originators. It offers products designed to meet the specific needs of small businesses, including cash management services.
The Wealth and Asset Management segment provides a full range of wealth management solutions for individuals, companies, and not-for-profit organizations, including wealth planning, investment management, banking, insurance, trust, and estate services.
TD Cowen has a Buy rating with a $60 target price.
Regions Financial
Serving the fast-growing sections of the United States, this is a conservative approach for growth and income investors seeking passive income as the stock pays a solid 3.46% dividend. Regions Financial Corp. (NYSE: RF) is a full-service provider of consumer and commercial banking, wealth management, and mortgage products and services.
The company has customers across the South, Midwest, and Texas, and through its subsidiary, Regions Bank, operates approximately 1,250 banking offices and more than 2,000 ATMs.
Its segments include:
- Corporate Bank
- Consumer Bank
- Wealth Management
The Corporate Bank segment represents the bank’s commercial banking functions, including commercial and industrial lending, commercial real estate lending, and investor real estate lending.
The Consumer Bank segment represents its branch network, including consumer banking products and services related to:
- Residential first mortgages
- Home equity lines and loans
- Consumer credit cards
- Consumer loans, as well as the corresponding deposit relationships
The Wealth Management segment offers a range of credit-related products, including trust and investment management, asset management, retirement and savings solutions, and estate planning services.
Goldman Sachs has a Buy rating with a $32 target price.
Truist Financial
This company was created through the 2019 merger of SunTrust Bank and BB&T and pays a strong 4.03% dividend. Truist Financial Corp. (NYSE: TFC) is a financial services company.
As a commercial bank, it offers a range of products and services across its wholesale and consumer businesses, including:
- Consumer and small-business banking
- Commercial banking
- Corporate and investment banking
- Wealth management
- Payments
- Specialized lending
Its segments include Consumer and Small Business Banking (CSBB) and Wholesale Banking (WB).
CSBB segment serves retail, premier, and small-business clients, providing transaction, money market, savings, time deposits, and payment services, credit cards, loans, and mortgages through digital banking, a network of community banking branches, ATMs, virtual service centers, and other channels.
The WB segment offers a comprehensive range of products, solutions, and advisory services for commercial, corporate, institutional, and wealth clients. It also invests in certain affordable housing, New Market Tax Credit, and Renewable Energy Tax Credit investments.
Morgan Stanley has an Overweight rating with a $69 target price.
U.S. Bancorp
Based in Minneapolis, this super-regional financial giant is an outstanding choice for growth and income investors now, offering a hefty 3.53% dividend. U.S. Bancorp (NYSE: USB) is a financial services holding company.
The bank’s segments are:
- Wealth
- Corporate
- Commercial and Institutional Banking
- Consumer and Business Banking
- Payment Services
- Treasury and Corporate Support
It offers a comprehensive range of financial services, including lending and deposit services, cash management, capital markets, and trust and investment management services. It also engages in credit card services, merchant and ATM processing, mortgage banking, insurance, brokerage, and leasing.
The company’s banking subsidiary, U.S. Bank National Association (USBNA), is engaged in the banking business, principally in domestic markets. USBNA provides a range of products and services to individuals, businesses, institutional organizations, governmental entities, and other financial institutions.
The non-banking subsidiaries offer investment and insurance products to customers primarily within their domestic markets, as well as fund administration services to a range of mutual and other funds.
Oppenheimer has an Outperform rating with a target price of $77.
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