It hasn't been a great week for bank investors, with the major banks all seeing their share prices fall between 5% and 8% compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), which for the week was down 3.6% by midday on Friday.
The falling share prices have altered the forecast dividend yield for each of the "Big 4". On estimates for the financial year 2013, Westpac (ASX: WBC) now leads the pack with a forecast dividend yield of 6.63%. This is substantially ahead of ANZ's (ASX: ANZ) forecast yield of 5.66%, Commonwealth's (ASX: CBA) 5.16% and NAB's (ASX: NAB) 6.03% (source: Goldman Sachs estimates).
The forecasts are a reminder that investors should not rely on last year's dividend payments when calculating yield. The ups and downs of the stock market, coupled with its forward looking nature make an assessment of bank stocks (or any stock for that matter) based on historic dividend yield alone unwise. For example, based on financial year 2012 dividends paid, the highest yielding bank today is National Australia Bank at 5.74% and in second place is Westpac with 5.68%. So a reliance on historic reported dividends would have investors purchasing NAB over Westpac, rather than the other way around if based on future expectations.
Foolish takeaway
Not all banks are created equally. Each has their own set of strengths and weaknesses. Given the inherent leverage in banks, it is most important to focus on the weaknesses as these can carry significant risks. As such, investors shouldn't simply pick a banking stock based upon the highest yield. The yield is only one factor in estimating what you expect your overall return from an investment to be.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
