Mortgage Lender With 7% Dividend Yield Raises Payment 12%!
I found a regional bank with an amazing dividend yield.
The company is TFS Financial Corp (ticker: TFSL), and its 7.25% dividend yield is one of the highest among regional banks.
For years, TFS Financial kept its dividend flat at a $0.2825 payment every quarter.
But the company just announced it’s raising its dividend to $0.3175, which is a 12% bump.
A dividend yield over 7% with double-digit dividend growth means we just found the perfect dividend stock, right?
Not so fast.
Many financial websites consider TFS Financial a regional bank… but it isn’t.
TFS Financial is actually a mutual holding company (MHC) for Third Federal Savings and Loan.
What is a mutual holding company and why is it important?
Over 80% of TFS Financial is owned by Third Federal Savings and Loan.
Third Federal Savings and Loan is made up of the depositors and borrowers of TFS Financial.
The remaining 20% is held by public investors such as investment managers or people like us.
Well, is Third Federal Savings and Loan a regional bank?
No, it isn’t.
It’s primarily a mortgage lender while offering savings accounts to fund its loans.
Regional banks also deal with mortgages, but they lend out money to businesses as well as provide investment management services.
Why is TFS Financial considered a regional bank?
There aren’t many publicly traded savings and loan stocks available.
So rather than give them their own industry, financial data providers just lump them into regional banks.
Let’s get back to the dividend.
TFS Financial is raising its dividend by 12%, which is its first dividend increase since 2021.
The higher payment is just around the corner.
You need to own stock in TFS Financial by September 8 (tomorrow) to get the higher dividend.
What does TFS Financial’s dividend payout ratio look like?
Based on reported earnings, it appears its payout ratio is over 300%!
It sounds like a major red flag, but once again, financial websites aren’t handling TFS Financial correctly.
Whenever TFS Financial pays a dividend, Third Federal Savings and Loan waives its right to the dividend.
And remember, over 80% of TFS Financial is owned by Third Federal Savings and Loan.
Most websites calculate the payout ratio by dividing dividend per share by earnings per share.
However, fewer than 20% of the shares are receiving a dividend, so the payout ratio is inflated.
So TFS Financial’s 300% payout ratio should really be around 60%, which leaves plenty of extra cash to grow the business.
Why would Third Federal Savings and Loan waive the dividend?
Remember, it’s made up of the borrowers and depositors of TFS Financial.
They are more concerned about the stability and creditworthiness of TFS Financial, and don’t want to damage it by taking out extra cash.
Unfortunately, the issues with financial data don’t stop with the dividend.
TFS Financial’s price-to-earnings (P/E) ratio is almost 50x, which is extremely high, especially for a financial company.
But remember, over 80% of the shares are owned by Third Federal Savings and Loan.
Including those non-dividend-paying shares in the calculation artificially inflates the P/E ratio.
Instead, TFS Financial’s P/E ratio is around 10x, which is more in line with other financial stocks.
It can be a little confusing, but sometimes we need to dig in further to understand what’s happening behind the data on some dividend payers.
On the surface, TFS Financial looks overpriced and about to run out of money.
But understanding its corporate structure and adjusting the data shows TFS Financial is a safe dividend stock with an excellent yield.
Michael Jennings
Dividend Stocks Research
Category: Dividend Stocks To Buy?, Dividend Yield
