The Role of Bank Shares in High Dividend Funds

Key Risks:

1. Bank dividends can be cut sharply in recessions, lowering income and share prices.
2. A heavy concentration in the financial sector increases exposure to sector-specific shocks.
3. Regulatory changes or higher capital requirements can reduce future payouts and valuations.

For investors seeking regular and reliable income, high dividend stocks and funds have a unique appeal. The companies behind them pay out a high proportion of profits to their shareholders in the form of dividends, who can take them as income –or elect to reinvest them for future capital gains.

Investing in high dividend stocks might also be a lower risk relative to other equities, providing the stocks are chosen with an eye to the reliability of their dividends. For instance, investment research firm Morningstar frames high dividend strategies as being able to “cushion declines in times of market downturns” when describing its Dividend Leaders Indexes. Nevertheless, all equities are risky and dividend stocks might as well underperform broad benchmarks.

But a key concern among investors in high dividend funds such as our VanEck Morningstar Developed Markets Dividend Leaders ETF (TDIV) is whether what’s typically a high exposure to financial stocks such as banks might pose an unforeseen risk if there were a banking crisis. What’s the likelihood of a crisis that forces banks to cut their dividends triggering a significant fall in their share prices?

In order to answer that question, we asked the team of financial analysts at Morningstar, which calculates the index that our ETF tracks, about whether this posed a significant risk. You will find their view further down this blog, noting that the financial services industry’s risk exposure and regulatory oversight have improved significantly since the 2007-2009 great financial crisis.

Despite today’s record asset prices, persistently tight credit spreads and moves towards deregulation in the United States, they are optimistic. What’s more, they do not expect the amount of regulatory capital that US banks must hold to be significantly reduced.

Banks Have Higher Payout Ratios

Returning specifically to our ETF as well as the underlying index, financial stocks are currently by far its biggest sector. They account for more than four tenths (41%) of the portfolio at the time of writing with banks being around a third of the fund¹. The financial companies in the portfolio include the banks HSBC Holdings, Intesa San Paolo, BNP Paribas among others, alongside insurers such as Zurich Insurance Group and Swiss Re.

Source: VanEck.

Like stocks from other sectors, they qualify for inclusion in the ETF’s through being among the top 100 dividend income payers globally. They have high dividend yields that are judged resilient and likely to grow.

Major banks naturally fall into this universe. Indeed, a paper from the respected Bank For International Settlements (BIS) notes that banks tend to have higher dividend payout ratios than non-financial firms². This appears to be the result of banks having to hold a significant amount of equity capital against their risk-weighted assets (or loans) under Basel III capital adequacy rules. This requirement suppresses their return on capital, resulting in a lower share price valuation and higher dividend yield.

Dividend Yield of Financial Services Companies / October 2015 - October 2025

Source: Morningstar, October 2025.

Additionally, it should mean that their dividends are likely to be resilient. In other words, payouts expected to be maintained or grow; however, dividend levels can fall and are not guaranteed. That avoids the classic ‘yield trap’ when a high dividend stock’s yield signals that the company’s fortunes are deteriorating and the dividend is likely to be cut. But uncertainty, of course, is also present here.

What follows is the Morningstar financial team’s view of the resilience of financial stocks at the current time.

Morningstar’s view

After the 2007-09 meltdown, it is completely understandable that clients would harbor some concerns about heavy exposure to financial services firms, especially with asset prices flirting with record levels and with persistently tight credit spreads. We think that it is important to highlight, however, that both the financial services industry’s risk exposure and regulatory oversight have improved significantly in the aftermath of the great financial crisis. Below, we outline a few of the key changes that have helped to proactively remove risk from the banking system and to strengthen banks’ buffers of high-quality capital.

1. Stronger Capital Buffers. Regulatory reforms now require banks to hold more high-quality capital relative to their risk exposure.
   

   Type of Capital Buffer	Base II (Pre-Dodd Frank)	Base III (Post-Dodd Frank / Current)	Goldman Sachs Example, 2024
   Common Equity Tier 1 (CET1)	4% to match Tier 1 Requirement	4.5% of RWA (minimum)	4.50%
   Stress Capital Buffer (SCB)	Not applicable	U.S. only; 2.5% of RWA (minimum)	6.20%
   GSIB Surcharge (Large Banks)	Did not exist	1% minimum (goes up based on G-SIB bucket, no maximum)	3%
   Countercyclical Capital Buffer (CCyB)	Did not exist	0 - 2.5% (regulator discretion based on credit conditions)	0.0%
   Total CET1 Requirement	4% minimum	7% minimum (scales up from there)	13.70%

    

2. Lower Leverage. Capital buffers are measured relative to risk-weighted exposure, with riskier assets receiving higher weights. Across our coverage, banks are quite well capitalized, carrying a median buffer of 210 basis points relative to regulatory minimums as of the June 2025 stress test date. For many banks, particularly investment banks, total leverage (equity/assets) has declined as well. This lower average returns on equity but also stabilizes those returns.

   Source: Morningstar, 2001-2034 (projections).

3. Improved Oversight. Banks are now subject to many more requirements not just regarding capital (under Basel III regulation), but also liquidity, loss absorbing capacity, restrictions on engagement in riskier activities, and performance under stress than prior to the financial crisis. All systemically important US banks now undergo annual stress testing, which determines the amount of capital they must hold as a stress capital buffer to absorb losses based on often historically harsh scenarios. This year’s stress test, which was considered “easy,” assumed a 7.8% decline in real GDP, unemployment peaking at 10%, a 50% decline in equity prices, a 33% decline in housing prices, a 30% decline in commercial real estate prices, and a 6.6% loan loss rate over the two-year period beginning in the first quarter of 2025. Elsewhere, banks must comply with:

• • Requirements for highly liquid holdings that cover expected short-term outflows (LCR)
  • Stable funding ratios that seek to address asset-liability mismatches (NSFR)
  • Minimum requirements for long-term debt, common equity, and additional tier 1 equity holdings to absorb losses (TLAC)
  • Restrictions on total bank leverage (SLR and eSLR) including off-balance sheet exposure
  • Prohibitions regarding proprietary trading
  • Limits on risky investments in covered funds (including private equity and hedge funds) to 3% of tier 1 equity
  • Higher risk-weights for riskier asset classes like equity (from 100% to 300%-400%), high-LTV residential mortgages, commercial real estate, and cryptocurrency (1,250%, recently proposed)

Overall, we view the system as better prepared to handle a downturn than it has been in prior cycles. While we acknowledge valid concerns regarding a general posture toward de-regulation and loosening capital buffers, we expect the global financial system to remain significantly better capitalized and view risk discipline as generally stronger than it was in 2007-09, even with a modicum of capital relief. Our read through of US Vice Chair of Supervision Michelle Bowman’s commentary has been that the agency is considering revisiting overlapping restrictions, like the enhanced supplemental leverage ratio, with the proposal re-positioning that measure as a backstop, as intended, rather than a binding constraint for banks. We’re not convinced that the industry is poised to see significant capital relief at this stage, although we’ll learn much more in the next two to three quarters. Rather, we think that the most punitive iterations of the Basel III endgame proposal are likely to be retired, with our initial estimates pointing toward a 20% increase in risk-weighted assets (RWA’s) for many of the larger banks in our coverage and a mid-teens uplift in required CET1 capital holdings. Now, we pencil in closer to a 5% to 10% uplift in RWA’s for trading-heavy banks and a de minimis impact for smaller and regional lenders.

Finally, profitability remains quite strong industrywide and is the first line of defense against rising credit costs, as highlighted by Morningstar’s European bank analyst Johann Scholtz. European bank profitability has improved dramatically relative to the 2012-22 period, while European financials analyst Niklas Kammer notes that higher central bank liquidity, convertibility of AT1 bonds, and a more pronounced appetite for quicker regulatory intervention in the EU help us get more comfortable with higher financial services exposure in the TDIV product amid the current environment.

Conclusion

From time to time, banks may make credit losses. It’s the nature of their business. In the autumn of 2025, for instance, Western Alliance Bank and Zions Bank, two regional US lenders, have disclosed that they were exposed to alleged fraud by borrowers. Similarly, private credit funds are nursing losses following failures by US car parts maker First Brands and auto lender Tricolor.

But Morningstar’s analysis suggests that banks are highly capitalized and in sound financial shape – better prepared than in previous economic cycles for the next downturn. Arguably, regulation makes banks resilient and may offer investors income opportunities, but they also involve market, credit and regulatory risks that could reduce dividends and share prices. It is still worth remembering that the situation on financial markets can rapidly change and investing in equities is risky.