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1 Magnificent Dividend Stock Drops 16% to Buy and Hold Forever
Do falling stock prices create great buying opportunities? Like most things in life, it depends. A stock with a proven track record and excellent prospects that is falling based on short-term external headwinds – well, that sounds like an advantageous buying opportunity to me.
Add in a juicy dividend and a big thumbs up from Warren Buffett and I think you’ve found a great candidate for your portfolio.
With that introduction, let’s talk about Bank of America (NYSE: BAC) and why you might want to buy the shares now.
Buffett’s favorite bank
Bank of America is responsible for 10.6% of Berkshire Hathaway investment portfolio, its second largest position behind Litter.
Bank of America is a classic Buffett stock. It has a strong consumer-facing business and plays an important role in the US economy. He has a lot of money (one of the reasons Buffett loves bank stocks) and varied sources of income from his various businesses.
Always on the lookout for undervalued stocks, Buffett invested in Bank of America after the 2011 financial crisis, when it was in trouble. BofA shares may still be undervalued: they trade at a price pertangible book value of 1.6, which is below many similar banks.
Why Bank of America Stock Is Down Right Now
Despite all of Bank of America’s wonderful qualities, the stock is down 16% from its highs. Revenue and net profit fell compared to last year, and return on tangible equity (ROTCE) fell from 17.4% last year to 12.7% this year in the first quarter of 2024.
Part of this was due to accusations related to the collapse of several banks last year. And part of that is related to higher interest rates.
All banks are operating in a pressured environment at the moment. Many companies are feeling the impact of inflation and high interest rates, but banks feel it acutely because it directly affects their business. High interest rates mean fewer loan approvals, higher default rates and higher interest paid on retail deposits.
There are positive elements, such as higher interest rates on loans. But a tense economy means less money circulating, and that’s the core of a bank’s business. That is exactly the objective of the Federal Reserve’s monetary policy at the moment: to curb an expanding economy and reduce inflation.
There have been many recent wins at BofA that illustrate its resilience and how it is taking advantage of the current macroeconomy to build its business and position itself for the long term. It added 245,000 new consumer accounts in the first quarter and more than 1 million credit cards, in addition to 29,000 accounts in global wealth and investment management. It is also gaining market share in the global banking sector, with 25% more accounts year over year in the first quarter.
The story continues
Expenses increased at a rate below inflation due to strict cost management, and net interest income reached $14.2 billion, exceeding its projections.
That’s why I call this a short-term external headwind. BofA has a well-run consumer-facing business with lots of revenue streams and lots of money. When interest rates fall, business should improve and stocks should rise.
Excellent dividend from BofA
Bank of America pays a growing dividend that yields 2.4% at the current price, well above the S&P 500 average. It has been increased annually for around 10 years since the bank’s recovery from the financial crisis, and has risen by a staggering 2,300% over that period. It is currently in an excellent financial position and the current challenging economy is not affecting its dividends.
Bank of America is a strong company with excellent dividends, and now is a great time to buy shares and hold them forever.
Should you invest $1,000 in Bank of America right now?
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America and Berkshire Hathaway. The motley fool has a disclosure policy.
1 Magnificent Dividend Stock Drops 16% to Buy and Hold Forever was originally published by The Motley Fool