There's no question that the 'Big 4' banks have been wonderful long term investments.
A strong economy, rising household incomes and a booming property market have — amongst other things — helped the banks achieve eye-watering growth over the past few decades; growth that has underpinned some of the best dividend returns to be found anywhere on the ASX.
The Commonwealth Bank (ASX:CBA) is the best example. Since listing as a public company in 1992, it's dividend has grown by more than 900%.
As you can see, investing in the bank has been far more lucrative than putting money in the bank!
As such, it may well seem odd that none of the banks have ever featured as recommendations for the service I run; Motley Fool Dividend Investor. After all, the whole point of this service is to provide our members with recommendations that provide safe, reliable and attractive dividends — exactly what the banks have managed to deliver in the past.
Part of the reason is that since we started Motley Fool Dividend Investor late last year, there have simply been better income opportunities. And though it is still early days, the results to date seem to bear that out.
Since inception, the average return from our recommendations are, with dividends included, 13.5%. By comparison, the average total return from the Big 4 banks has been just 0.9% over the same period — and yes, that's including dividends!
But the main reason I urged members to stay away from the banks is because they were unjustifiably expensive, by almost any measure you could care to choose.
Now if there's one thing i've learnt about the sharemarket, it's that things can stay irrational for a long time — and no matter how silly things get, they can always get sillier! And sure enough, in the early days, the banks continued to defy logic and go on to carve out record highs.
With bank share prices making headlines, I felt members deserved a thorough explanation as to why we were steering clear. In April, I wrote to members outlining the rationale in a detailed, two-part update.
As mentioned above, the lack of value was a key reason. At the time, the CBA was trading at a near record level relative to its earnings and its book value. But it wasn't all about price.
In my view, the market was ignoring some key risks facing the banks. The biggest was the reliance on residential lending — home loans — which has ballooned out to record proportions.
It seems that the Australian Prudential Regulation Authority (APRA) was also concerned. Not just by the magnitude of the borrowing, but how it compared to the banks' capital reserves. As such, it's recently asked them to shore up their balance sheets.
And it's been exactly that that has sent shares plummeting over the past week.
When ANZ announced that it was raising $3 billion, shares saw their biggest one day decline since the GFC — a 7.5% one day drop, and one of the worst in it's history!
The other banks experienced similar falls. And with expectations for CBA and Westpac to also tap the markets for more cash in the near future, prices remain under pressure (NAB raised some money earlier this year).
Of course, there will come a point where it makes sense to invest in the banks. When their balance sheets are in better shape, and their share prices represent good value, I'll be urging Motley Fool Dividend Investor members to load up!
But for now, as before, there simply remain far better opportunities.
Take for example last month's recommendation. I won't disclose it out of respect to our members, but I can tell you that it is offering a fully franked yield of over 7%. And this isn't a business in trouble — it's just announced adouble digit jump in its net profit! Moreover, it expects strong growth, and high dividends, to continue for the foreseeable future.
And we have a scorecard full of dividend dynamos that are offering outstanding yields. Solid, proven and low risk businesses that generate loads of cash for their shareholders, but that tend to get overlooked because of the market's focus on stocks like the banks.
Importantly, there are a lot of other great opportunities out there. In fact, I'll be releasing our next Motley Fool Dividend Investor recommendation tomorrow.
It's one of Australia's longest surviving companies, with its origins dating back over 80 years, and has certainly stood the test of time. But don't let its age fool you; this company has delivered its shareholders with an average annual total return of almost 20% per year for the last 5 years. The consensus forecast is for a double digit lift in earnings and dividends, and it's currently offering investors a dividend yield of 4.7% fully franked. And, if you account for the pre-tax return by factoring those franking credits in, the yield is a solid 6.8% yield!
Foolish Takeaway
With interest rates at record lows — and likely to drop lower — high yielding, dividend paying shares have never been more attractive. But with the banks facing some meaningful risks and (despite their plummeting share prices) still failing to offer compelling value, investors are needing to look farther afield.
Fortunately, for those prepared to move beyond the top 100 ASX companies, there are plenty of quality, low risk companies that continue to offer great value and attractive yields.
The kind of companies that members of Motley Fool Dividend Investor are buying — and profiting from.
With a brand new recommendation due out tomorrow, there's never been a better time to join!
