With the 2007-2008 financial crisis and global recession being economic adversities of the past and recent strengthening of the economy, the Federal Reserve Bank is likely raising the benchmark rate by 25 basis points (bps). While this is normally not a large increase, it has been nearly seven years since the Fed decided to keep the benchmark rate between 0 and 25 bps, which may cause a high degree of volatility.

Depending on the duration and rate at which the Fed decides to raise rates, it may cause stocks to go into a frenzy after the two-day Federal Open Market Committee (FOMC) meeting Dec. 15 and 16, 2015. However, financial stocks may get a pop in market value during 2016. Since the financials sector includes companies that lend, insure and manage assets, the sector is likely to benefit from a rising interest rate environment; these companies' net interest margin expands, and the companies generate more profit.

Low unemployment and increasing wages in the United States, which has pushed the Fed to raise interest rates, may increase the demand for loans. Insurance companies may generate higher returns from the premium income earned through their policies. In turn, their earnings are poised to increase, as well as their stock prices.

Some of these financial stocks offer attractive dividend yields, which allows investors to receive annual or quarterly cash dividends. To analyze these stocks' dividends, analyses of their dividend payout and coverage ratios are essential. The dividend payout ratio is calculated by dividing a company's dividend per share by its earnings per share (EPS) over a fiscal period. This ratio calculates the portion of a company's earnings that is paid out to its investors in the form of cash dividends. Additionally, it indicates the stability of a company's dividend rate. The dividend coverage ratio is calculated by dividing a company's EPS by its dividend per share over a fiscal period. It indicates the number of times a company is capable of paying its dividends per share using its EPS.

Investors looking for dividend-paying stocks in the financials sector should focus on the Fed's interest rate decision, economic activity and the stocks' dividend coverage and payout ratios. Regardless of whether the Fed decides to lift off during its December meeting, investors should consider these five dividend-paying financial stocks in a well-diversified portfolio for 2016.

Wells Fargo

As of Dec. 9, 2015, Wells Fargo & Company (NYSE: WFC) is the third-largest stock in the financials sector, coming in behind Berkshire Hathaway's Class A and Class B shares. While Wells Fargo is only up 1.41% year to date (YTD), the global banks industry is down 6.43%, as reported by Morningstar. However, based on trailing three-year data, it has an annualized return of 20.47%.

For the fiscal year ending Dec. 31, 2014, Wells Fargo grew its EPS by 5.4% from 2013. Over the next five years, Wells Fargo is expected to grow its EPS by an average annual 10%. Its expected earnings growth and dividend yield of 2.77% should keep Wells Fargo on investors' watchlists in 2016.

During the global recession, Wells Fargo cut its quarterly dividend from 34 cents to just 5 cents per share. Since then, it has raised its quarterly dividend to 37.5 cents in 2015 and will likely raise its dividend in 2016. Wells Fargo's dividend grew by 650% in just five years, which is an annualized rate of 130%. Based on its forward annual dividend of $1.50 per share and its expected EPS for the 2015 fiscal year, Wells Fargo has a dividend payout ratio of 36.1% and a dividend coverage ratio of 2.77. Therefore, its dividend has room to grow and is stable.

JPMorgan Chase

JPMorgan Chase (NYSE: JPM) is another financials stock poised to raise its dividend and experience a rise in its stock price and earnings in 2016. JPMorgan Chase has significantly outperformed its Morningstar category of global banks in 2015. JPMorgan Chase has a YTD return of 7.29%, while the global banks industry is down nearly 7% YTD. Moreover, JPMorgan Chase is outperforming the S&P 500 Index, which only has a YTD return of 1.44%. As of Dec. 9, 2015, JPMorgan Chase has a dividend yield of 2.69%.

Similar to Wells Fargo, JPMorgan Chase slashed its quarterly dividend to just 5 cents per share in 2009 and kept its quarterly dividend at that rate until the end of the 2010 fiscal year. It currently offers a quarterly dividend of 44 cents per share, which is a 780% increase in just five years. Based on its expected full-year 2015 EPS and annualized dividend per share of $1.76, it has a low dividend payout ratio of 29.8% and a dividend coverage ratio of 3.36. This indicates that JPMorgan Chase's dividend has more room to grow and is well-positioned to rise in 2016.

Bank of America

Although Bank of America Corporation (NYSE: BAC) is down 3.3% YTD, the global banks industry has experienced larger losses. Bank of America has a price-to-book (P/B) ratio of 0.77, indicating that it is trading below its book value. Bank of America is expected to report a full-year 2015 EPS of $1.43, which is over a 200% increase from its EPS in 2014. It is expected to grow its earnings at an average annual rate of 8.5%.

Bank of America has an annual dividend of 20 cents per share and a dividend yield of 1.17%. While its dividend rate and dividend yield are not as attractive as those of Wells Fargo and JPMorgan Chase, it has an extremely low expected dividend payout ratio of 14% and a high expected dividend coverage ratio of 7.15. Therefore, its dividend is robust and will likely increase during 2016, assuming the Fed raises rates and Bank of America's earnings get a boost.


As of Dec. 9, 2015, MetLife Inc. (NYSE: MET) has a market capitalization of $54.01 billion and is the third-largest company in the life insurance industry. Since MetLife is only trading at 9.42 times its earnings and below its book value, it may be considered a tactical investment in a well-diversified portfolio for the potential increase in interest rates during 2016.

MetLife is down 7.44% YTD, while the life insurance industry is only down 3.41%, which may indicate a buying opportunity in the stock. MetLife offers an annual dividend of $1.50 per share and is expected to report a full-year 2015 EPS of $5.04. Therefore, it has a dividend payout ratio of 29.8% and a dividend coverage ratio of 3.36. These ratios indicate that MetLife has a stable dividend and has the potential to raise it.

Discover Financial Services

Discover Financial Services (NYSE: DFS) is a credit services company that is poised to rise with the looming increase of the benchmark interest rate set by the Fed. If interest rates rise at the end of 2015, Discover is poised to grow its net interest income and its earnings. As of Dec. 9, 2015, Discover offers an attractive dividend yield of 2.07%.

Discover has grown its quarterly dividend by a colossal 1300% over the past five years, which is an annualized growth rate of 260%. Discover only paid a quarterly dividend of 2 cents per share in 2010 and currently pays a quarterly dividend of 28 cents per share. It has an expected dividend payout ratio of 21.2% and a dividend coverage ratio of 4.72 for the 2015 fiscal year.

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