November's stock market relapse is threatening to erase all of the gains made last month. Financials have led the way, despite a majority of companies in the sector posting strong profits. If the European situation stabilizes, investors might uncover a few money managers with utility-sized dividend yields.

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Profitable, Accidental High Yielders
Excluding REITs, financials generally do not pay abnormally high dividend yields. The sector is being beaten down so thoroughly, that several big money managers now feature the type of high yield that would normally be seen in the utility space. Have a look at this list of high yield money managers trading at or near their 52-week low:



Federated Investors, Inc. (NYSE:FII)
6.3% dividend yield

BlackRock, Inc. (NYSE:BLK)
3.6% dividend yield

Janus Capital Group Inc. (NYSE:JNS)
3.4% dividend yield

Eaton Vance Corp. (NYSE:EV)
3.5% dividend yield



Those are very big yields for financial stocks. To put these numbers in context, the Financial Select Sector SPDR (ARCA:XLF) yield is just 1.5%. Asset managers are more closely resembling the Utilities SPDR's (ARCA:XLU) 3.9% yield. (For related reading on dividends, see The Power Of Dividend Growth.)

Moreover, these accidental high yielders are consistently profitable companies. BlackRock, the world's largest money manager by assets, earned $2.83 per share in the third quarter. Federated Investors recorded 38 cents a share in profits last quarter, Janus earned 15 cents a share and Eaton Vance earned 40 cents a share, during their fiscal fourth quarter.

Swimming Upstream
Despite the dependable earnings power, money managers do still face a somewhat difficult environment. The momentum trade going against financials has not spared profitable U.S. banks or money managers. Most managers are experiencing elevated redemption rates, amid the current turmoil, and minimal return on money market funds. The banking contagion rocking European banks and rippling through major U.S. money centers, is dragging down the entire sector.

As the sovereign debt crisis has rattled stocks, the value of many of the funds (and fees) managed by these companies, have taken a hit. The interest rate picture continues to squeeze the profits of money managers, as well. With the fed funds rate holding near 0%, and LIBOR still very low, yields on many cash instruments are so depressed, that many money managers are voluntary waiving fees; charging annual fees on low yielding instruments would have a destructive impact on income funds designed to preserve cash. The outlook for these revenue streams is uncertain, while central banks are expected to pursue a quantitative easing agenda.

The Bottom Line
There is a silver lining. If the European situation stabilizes and interest rates find some kind of floor, money managers are in good position to capitalize. Stock values would probably experience a leveraged increase, after having fallen so far of late. Federated, in particular, would draw a lot of interest, based on the enormous yield alone. The stock is down a staggering 40% year-to-date, 16% in the last month alone. The drop has improved Federated's valuation significantly and made the stock an accidental high yielder.

In a sideways market, the high yield becomes even more attractive for income seekers. The company has an exceptionally strong balance sheet with $322 million in cash and cash equivalents, and net debt of just $70 million. The problem is that the market just doesn't trust financials yet. It's really a shame to let such fantastic dividend yields go to waste. (For related reading on the balance sheet, see Reading The Balance Sheet.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matt Cavallaro did not own shares in any of the companies mentioned in this article.



Tickers in this Article: FII, BLK, JNS, EV, XLU, XLF

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