My highest dividend-paying stocks to buy in the September liquidation

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The September liquidation has proved daunting so far, with the S&P 500 falling nine out of 13 trading days through Monday’s close for a rapid 4% drop from its recent all-time high. Fears about the delta variant, the potential decrease in its bond purchases by the Federal Reserve and now the problems in the Chinese real estate market have made investors quite sensitive.

But with lower prices comes opportunities as well. Savvy investors are now scouring the market to see what they can get at a discount. For investors who love passive income and high dividend yields, I would highly recommend taking a look at one of the largest banks in the United States, Citigroup (NYSE: C). Here’s why.

The Greatest American Banking Opportunity

Since the Great Recession, Citigroup has generated mediocre returns compared to its big bank peers: JPMorgan Chase, Bank of America, and even troubled Wells fargo. Citigroup never fully recovered from the financial crisis and also faced regulatory issues, which culminated last year with a $ 400 million civil sanction order and a cease and desist order. abstain from regulators.

All of these factors have caused Citigroup to trade at a much lower valuation than its peers. The bank trades at just 86% of the tangible book value (TBV), which is a bank’s equity minus its goodwill and intangibles, and is what the bank would be worth if it were wound up. Peers like JPMorgan and Bank of America have recently traded closer to or above 200% TBV.

Image source: Getty Images.

Citigroup has had a lower valuation than its peers for some time, so it’s fair to ask why. Is this just another value trap?

I see momentum in the business that hasn’t been there in recent years. On the one hand, the bank has a new leader in new CEO Jane Fraser, who is already making efforts to curb the sprawling and often confusing activities of the bank. Earlier this year, Citigroup announced it would shut down and sell inefficient consumer banking in 13 global markets where it doesn’t have the scale to compete. Instead, Citigroup plans to focus more on existing businesses that are already generating high returns, such as investment banking, securities services, wealth management, and treasury and commerce solutions.

In addition, Citigroup uses excess capital and earnings from quarterly profits to buy back shares. This is incredibly beneficial when the stock is trading below TBV, as buybacks not only increase earnings per share, but also TBV per share. Since banks are trading against their TBV, an increasing TBV is generally good for the stock price. In the last quarter, Citigroup increased the TBV per share by 3%, and I expect it to rise again solidly in the third quarter. Even if the bank was trading at its current TBV per share of $ 77.87, which would be a low valuation for most banks right now (and I think quite reasonable for Citigroup), that implies around 16% of increase from current levels.

A strong dividend

One thing Citigroup has going for it right now is that it has a higher dividend yield than any of its peers, currently over 3%.

BAC Dividend Yield Chart

BAC Dividend Yield Data by YCharts

Even if the bank traded near or slightly above TBV at $ 80, its return would still lead the pack at 2.5%.

Additionally, Citigroup’s dividend payout ratio – dividends expressed as a percentage of earnings – is in line with its competitors and remains quite low, giving the bank plenty of scope to keep increasing the dividend (although share buybacks are probably the best use of excess capital at the moment with the bank trading below TBV).

BAC payout ratio table

BAC Payout Ratio Data by YCharts

Citigroup looks like a buy

Citigroup stock, already at a depressed valuation, fell around 6% in September, providing another opportunity for investors to enter a good level and potentially very strong stock. There could be some concern in the wider economy with growing problems for the real estate developer China Evergrande Group, because Citigroup has exposure in the country and major banks in general are impacted by global economic events. But I still think Citigroup’s current valuation is way too low, given that the bank now has a real plan in place to simplify the business and improve returns. And while you wait for the stock to go up, you can enjoy a good 3% return – which is why this is my main dividend to buy right now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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