Last month, I invested a bit over $12,000 to buy 486 shares of Fifth Third Bancorp (FITB 1.18%), a Cincinnati-based super-regional bank that looks very much like it has been far more conservatively managed than the banks that failed earlier this calendar year.
As someone who has lived near Cincinnati, I'm familiar with that bank and its reputation for prudently managing its own balance sheet. Indeed, it's that penchant for prudence that attracted me to consider such a substantial investment in a bank at a time when so many people are worried about rising interest rates affecting their operations.
So far, that investment looks like it could very well pay off over time. Indeed, with its recent announcement that it is increasing its quarterly shareholder payment to $0.35 per share from $0.33, my $12,000 investment is already paying bigger dividends.
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Why I thought it could increase its dividend
In August, I was trying to figure out how to withdraw money from a 529 college savings plan in order to cover my son's first semester of college. That money was in a soon-to-mature Fifth Third CD, since it is the bank associated with my state's 529 plan.
Thanks to a late-breaking scholarship that my son earned, I ended up owing a bit less than I initially thought I would for those college costs, so I'd have more cash than I needed. I wanted to keep that money inside the 529 plan, which meant I needed to figure out where to reinvest it.
In looking at the available CDs, I was surprised at how low the rates were, relative to prevailing interest rates. As of this writing, the highest CD rate Fifth Third offers in that 529 plan is 4.75% for a CD of 6 to 11 months. For a shorter time period, it only offers 0.5%, and for anything two years or longer, rates top out at a mere 1.75%.
By contrast, two-year U.S. Treasuries are currently yielding around 5.1%, and three-month Treasuries are topping out above 5.5%. And even for investors looking for CDs over Treasuries, Bankrate shows opportunities to buy a CD with a better than 5.6% rate at the moment.
The relatively low rates that Fifth Third is offering compared to what else is out there sends a signal that Fifth Third doesn't think it needs to aggressively attract depositors in order to cover withdrawals.
Between Fifth Third's reputation for prudent financial management and the signal sent by those fairly low CD rates, I started to think it could very well be a bank worth investing in. When I then checked to see that it had previously raised its dividend in September 2022 and had a payout ratio below 40% of its earnings, it added up to a great chance for a near-term dividend hike.
A decent dividend plus a value price equals a big investment
Once I convinced myself that Fifth Third could increase its dividend, I still had to figure out how much I wanted to invest in it, given the worries that still exist around the banking industry. On that front, its shares were trading at around eight times its expected forward earnings, with analysts expecting modest earnings growth over the next five years or so.
Put together that modest valuation with a likely growing dividend, and it simply looked like far too good a deal to pass up. It looked very much like Fifth Third Bancorp's stock was being lumped in with the riskier regional banks, while several of its key measures were painting a picture of a far healthier business.
That combination told a strong-enough story for me to go all in with my investment, using up virtually all the investable cash I had available. It's still way too early to tell if that will turn out to be a good use of capital over time, but the fact that the bank raised its dividend as anticipated is certainly a good early sign that it might work out.
Values are out there -- if you're willing to look for them
Whether or not you think Fifth Third Bancorp is worth investing in, this story is a familiar one to value-focused investors. When the market gets scared, even the stocks of solid businesses can be put on sale. Those willing to look past the wall of worry just might be able to find opportunities to pick up shares for what turn out to be great value prices.
With the market still jittery about the economy, now is a great time to start seeking out bargains. You just might find a few that you're willing to invest in for yourself.
