Adding Independent Bank To My Dividend Portfolio

Just in case you haven’t noticed, it’s really, really hard at the moment to find a decent dividend yield in a stock that doesn’t require taking on substantial risk. That’s what happens when you’ve got elevated asset prices after a long rally, a still-low interest rate environment, and a Federal Reserve that has started what is likely to be a run of interest rate increases.

One way out of this box is to go for stocks with relatively modest current dividend yields–eschewing those risky 9% yields–but where company history and prospects strongly suggest that dividend payouts will go up in the future.

Independent Bank (IBCP), a small Michigan bank with 63 branches, $2.8 billion in assets, and a market capitalization of $512 million. (In December the bank announced that it would acquire Traverse City Site Bank and its five Michigan branches.) What’s especially important for my Dividend Portfolio is that the bank raised its quarterly dividend to 15 cents a share from 12 cents (25%, my arithmetic says) in the fourth quarter of 2017. That brought the forward dividend yield to 2.48% as of the close today, March 20, at $23.95. Retained earnings moved into the black in the quarter, which enabled the bank to raise the dividend.

Which certainly suggests that there are more dividend increases possible in 2018. (In 2017 the bank also decided to resume share repurchases–suspended for 2017–with a maximum purchase of 5% of outstanding shares.) The bank’s goal for 2017 was a 3% increase in net interest income; instead the year saw net interest income climb 12%. The plan for 2017 looked to loan growth of 10% to 11%; instead the bank saw loan growth of 25.5% in 2017. Total deposits rose 1.5% to $2.4 billion. Of those deposits about 77% were in transaction accounts–things like checking accounts–that pay very low rates of interest.

That’s important because it means that in a period of rising interest rates the bank’s cost of capital is relatively sheltered from increases in the market cost of borrowing capital. The bank said in its fourth quarter earnings slide show that it funded its core business from those deposits. Which means that as the Fed raises rates Independent Bank should see its own net interest margin climb.

Total loan defaults were low–with total new loan defaults at just $6.5 million in 2017–and the bank has a solid record when it comes to collecting on restructured troubled loans. 91% of troubled debt restructurings were current as of the end of 2017.

The bank’s shares have, importantly, outperformed the financial sector (as small cap financials did better than their big and super-size compatriots.) In the past month when the financial sector has come under pressure with the Financial Select Sector SPDR ETF (XLF) down 0.86%,shares of Independent Bank climbed 1.91%. Over the last three months Independent Bank shares were up 3.23% while the Financial Select Sector SPDR ETF advanced 2.83%.

I think this stock offers a decent (in this environment) dividend yield, the solid possibility for dividend increases, and the likelihood of capital appreciation. All of that makes it my newest pick for my Dividend Portfolio.