Charles Schwab (Shu -0.37%) An iconic name in the financial sector, given that the company essentially pioneered the discount brokerage business model. The stock price he has plunged about 33% so far in 2023. Schwab’s shares were punished, as were shares of local banks after two banks were hit by high-profile bank runs.
A contrarian investor can easily see this as a buying opportunity. But if you’re a dividend investor like me, you’d be better off investing your money in another financial icon.
thank you market
What I look for in potential investments are great companies whose stock prices have fallen beyond what seems to be temporary problems. One way he determines that is by looking at the relative dividend yields of attractive stocks. Basically, when yields are historically high, we want to dig deeper. Charles Schwab’s dividend yield is now at the high end of its historical yield range.
why? The main reason is that investors are concerned that customers will withdraw cash from the company. First Republic, SVB Financialand signature bankBanking service provider Charles Schwab is very concerned because a rapid cash draw could force it to sell long-term investments it holds on its balance sheet at face value. There are practical reasons. Bonds are allowed to be held at face value, but given rising interest rates (bond prices and interest rates moving in opposite directions), selling them may require a loss on those assets. there is.
Fear and risk probably don’t go together when it comes to Charles Schwab. One of the biggest reasons for optimism is that, unlike bankrupt banks, brokers have a much more diversified business. This seems to be a case of Wall Street overreaction. The big problem I have with Charles Schwab is a more mundane one. Even after the stock price has fallen significantly, the yield is only 1.8%.buddies financial icon T Rowe Price (Trow -0.16%) It has a historically high yield of 4.3%.
accustomed to ups and downs
T. Rowe Price is not a broker. A wealth manager who collects a fee for investing money on behalf of others. A company as iconic as Schwab, its share price has been in a doghouse since the broader market began to decline. At this point, the stock is down 50% from his 2021 peak, which is why the current yield is so high.
The big story is that T. Rowe Price’s business is powered by assets under management (AUM), the money you invest on behalf of others. As a fee-based business, this number drives revenue and earnings. More AUM means more income, less AUM means less income. In 2022 alone, T. Rowe Price’s AUM is down about 25% and his earnings are down 37%. It’s not good, but it’s comparable to an asset manager course. A bear market follows a bull market, and a bull market follows a bear market.
Let’s take a look at T. Rowe Price’s dividend history. Dividend has increased for 37 consecutive years. There have been many bull and bear markets during that period, including several actual recessions like the dot.com crash in 2000 and the recession that followed the Great Recession. Clearly, the asset manager has successfully handled how to navigate the rough seas of the industry while rewarding investors with dividend growth. In particular, we increased our dividend in the first quarter of 2023 and are fully aware of the headwinds we face now.
But the big reason for the confidence here is actually in T. Rowe Price’s balance sheet. The company has no long-term debt. This is basically as pristine as the balance sheet. So we have plenty of financial headroom as we wait for the market to turn around. When it finally comes to fruition, T. Rowe Price’s AUM will grow as investors return to the market, as the portfolios it manages also rise in value. This is exactly what happened after the previous recession.
As pointed out, Charles Schwab’s current drawdown is probably an opportunity for investors who think in decades rather than days. But if the modest yield still doesn’t entice you into this stock, you might be interested in T. Rowe Price and its historically high yield of his 4.3%. Sure, you might find CDs that yield that much, but you’re missing out on long-term dividend growth opportunities. And just like before, the problems facing T. Rowe Price today are very likely to be as temporary as previous bear markets have proved.
Charles Schwab is an advertising partner for The Ascent, a Motley Fool. SVB Financial provides credit and banking services to The Motley Fool. Ruben Greg Brewer has no positions in any of the mentioned stocks. The Motley Fool invests in and recommends SVB Financial. The Motley Fool recommends Charles Schwab and T. Rowe Price Group. The Motley Fool’s U.S. headquarters has a disclosure policy.