There are lots of reasons investors are flocking to bank shares in their chase for yield income.
For one, the major banks are all considered safe, dependable blue-chip companies. Another reason is nearly all of them are paying yields of over 5%.
There are however a number of reasons to tread carefully when it comes to banks…
Firstly, do you really understand their complex financial statements? If you don't, you're certainly not alone but it does then raise the obvious question of whether you can accurately value a bank.
Secondly, the domestic banks are heavily exposed to the residential property market through their dominance of the mortgage lending industry. While this has provided the major banks with exceptional profits thanks to the Australian love affair with property and booming property prices, it also creates a potential "Achilles heel" should a major correction occur within the property market.
A better alternative than the banks…
For the reasons outlined above, there are arguably safer ways to build a portfolio full of juicy fully franked dividend stocks. For example, you might be better off focusing on smaller, easier to understand companies that could potentially be lower risk given there are fewer unknowns and fewer moving parts in their businesses. Here are three to consider:
- Platinum Asset Management Limited (ASX: PTM): This leading global fund manager is forecast to earn 40.5 cents per share (cps) in financial year (FY) 2016 and pay a dividend of 39.1 cps according to research house Morningstar. Assuming these forecasts turn out to be accurate, Platinum is trading on a forward price-to-earnings (PE) ratio of 19.9x and a fully franked yield of 4.85%.
- Southern Cross Media Group Ltd (ASX: SXL): This owner of key radio assets as well as regional television broadcasting licenses is forecast to achieve earnings per share (EPS) of 10.4 cps in FY 2016 and pay fully franked dividends of 6.4 cps. With the stock currently selling for $1.02 per share, the shares are trading on a forward PE and yield of 9.8x and 6.3% respectively.
- Fantastic Holdings Limited (ASX: FAN): This leading retailer and manufacturer of sofas and other furniture items is forecast to benefit from the current home building boom with EPS and dividends of 14.1 cps and 11 cps respectively forecast in FY 2016. Based on these forecasts, the stock is trading on a forward PE of 14.7x and a fully franked yield of 5.3%.
