3 Dividend Stocks That Are Good Custodians for Assets

Erin Davis: We think that custody banking is a great business. We assign a wide moat to each of the three focused custody banks that we cover: BNY Mellon, State Street, and Northern Trust.

What custodial banks do is take custody of and provide safekeeping for financial assets like stocks and bonds for institutional investors, like pension funds and mutual funds.

The custodian banks typically also provide related back-office services, like recording settlement of sales and purchases, tracking day-end values, and collecting dividends. While these tasks may seem mundane, we actually see them as very [worthy of moats]. It's a business where intangible assets and switching costs are very important. It's critical that custodian services be performed reliably and accurately, and customers are loath to switch providers because of the risk of disrupting their businesses.

We see each of the custody banks that we cover as close to fairly valued right now. They are trading at a small discount to our fair value estimates but not enough to warrant a [Morningstar Rating for stocks of 4 stars].

Still they are good investments to keep an eye on. They are above-average dividend payers for financial services. Because they are so well-capitalized, they are able to pay out more than 30% of their income as dividends as opposed that 30% cap that we see on most financial-services firms.

They tend to also be very stable businesses, and we expect their returns to increase materially over the next several years as interest rates eventually increase.