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Big Bang With Small Bank Stocks

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Under siege for most of the past several years, the financial services sector has finally shown legitimate signs of life in 2012.

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That ETF is home to a plethora of well-known (and infamous) banking names including JPMorgan Chase (NYSE:JPM), Wells Fargo (NYSE:WFC), and Bank of America (NYSE:BAC). XLF has managed to gain 19% this year and the gains would likely be higher if not for an adverse reaction to the presidential election by banking names.

With healthy gains already notched by the largest financial services names, investors may be left wondering if the sector offers any remaining near-term upside. That question cannot be answered definitively, but what is clear is that some small- and micro-cap financial services do offer growth potential along with appealing dividend yields.

Medallion Financial (Nasdaq:TAXI): Medallion Financial is one of the more well-known stocks in the micro-cap universe if for no other reason than that the company has been around for almost two decades and because engages in originating, acquiring, and servicing loans that finance taxicab medallions. Basically, if you want be a cab driver in New York and need a loan to purchase the medallion, Medallion Financial helps you with that, so this is not your run-of-the-mill financial services company.

This may not be the type of company investors usually think of as being a strong dividend payer, but the reality is Medallion Financial has increased its dividend by a third since late 2010 and the payout has quadrupled since 2003. Medallion now yields about 7.4%, but beware of this name if it drops below its 200-day moving average. The shares reside just 5.5% above that important line.

CapLease (NYSE:LSE): CapLease is a real estate investment trust (REIT), so it's not surprising this company has a juicy 5.8% yield. By law, REITs are required to distribute at least 90% of their taxable income each year to shareholders as dividends. The company did cut its payout during the financial crisis, but it has increased the dividend in the past year.

Approximately 90% of CapLease's assets are owned single-tenant properties and while the company operates in just 24 states, the company does count the US government, TJ Maxx (NYSE:TJX), and Tiffany (NYSE:TIF) among its tenants.

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No positions in stocks mentioned.

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