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FTSE 100 banking stocks are reinstating dividends. Are they a wise investment?

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British banks have seen their share prices annihilated by the Covid-19 pandemic. FTSE 100 financial services company Barclays (LSE:BARC) was one of them. A year ago, the Barclays share price crashed over 51% in a few days. However, it has since recovered and is now only 12% lower than its January 2020 high. Lloyds Banking Group on the other hand is still down 39% from its January 2020 high. 

Barclays shows more strength than some because it has an investment banking arm, which offset the losses in its high street and commercial lending division. In contrast, Lloyds is much more reliant on mortgages and small business loans. Barclays also enjoys more of an international presence than Lloyds.

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In Barclays’ recent annual results for 2020, income increased 1% and profit before tax fell 30% to £3.1bn. It had to double its provisions for bad loans in light of the economic destruction and rising unemployment. It has also been a lifeline for small businesses struggling through the pandemic. Barclays has now reinstated its dividend and committed to a share buyback program.

Banking on dividends

Dividends are the lifeblood of a long-term investment strategy. They help build exponential wealth and dilute the risk when it comes to investing in individual stocks. Banking stocks have long made an attractive investment because traditionally they offer stable and consistent returns with attractive dividend yields. This trust and dependency was shaken after the 2008 financial crisis. And the Covid-19 pandemic brought a straight out ban on dividends across the board. So, are banking stocks a write off or is there still long-term value to be found?

Pros and cons

I’m not drawn to investing in traditional banks, because I see so much debt and destruction mounting in the global economy. And coupled with rising unemployment, it seems a disaster waiting to happen. However, I can understand the appeal. The big banks underpin the British financial system, so it’s unlikely that they’ll go bust. It’s also an unprecedented time for the economy, with interest rates at record lows and money printing gone mad. Once we emerge from the pandemic to a more robust society, interest rates are likely to be raised and the banks will recoup much of their losses and strengthen again. This gives a bullish case for getting in early and holding for the next decade.

But I see a couple of problems with investing in banking stocks today. Firstly, we are still in the midst of the pandemic. The vaccine rollout looks very promising, but how long it will take us to get the world of work back on an even keel remains to be seen. Secondly, the financial environment is changing at a record pace. Financial technology, known as fintech, is making inroads into modernising the way consumers bank. There are many up and coming and challenger banks looking to displace the traditional banking system, and there’s the complex world of cryptocurrency too.

With so many unknowns, I’m still unsure about investing in the banking sector.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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