Westpac Banking Corp (ASX: WBC) shares currently change hands at $30.33, which means they yield a dividend of 6% fully franked.
However, if we include the benefit of franking credits the grossed-up yield blows out to a huge 8.57%.
That compares to the 2.4% annual interest rate currently on offer from term deposits at a major bank.
Clearly, 8.57% is an extremely appealing return in the low-interest rate environment.
So many Australians would likely be sitting back asking themselves: Why don't I dump my term deposit for Westpac shares?
The answer: Risk.
Indeed, before we get too excited, it's important to remind ourselves that an investment in the sharemarket is far riskier than a partially government-guaranteed term deposit.
Therefore, the question should become: Does the higher expected return significantly outweigh the added risk of investing in shares?
That's not an easy question to answer. However, in my opinion, the answer is: it depends on what you want from your investment.
To me, a big dividend yield is only an optional extra to my primary reason for buying shares: capital growth.
After all, if you bought Westpac shares for their expected – but not guaranteed – 8.57% dividend yield, but its share price subsequently fell 10%, you'd be nursing a net loss on your investment.
Before you buy in
I believe all investors must ensure they have cash set aside for the equivalent of three or six months' worth of living expenses and expected costs before buying any shares.
Only then should you consider using cash, which may be tied up in a term deposit, for investment in shares.
Finally, it's vital you buy shares for less than their theoretical worth. Previously, I determined Westpac shares were worth around $27.70.
Given that Westpac shares are currently trading over $30 apiece, they're well outside my targeted buying region of around $20.
Of course, you could buy Westpac shares today, or any day for that matter, but that doesn't mean you should.
Always consider the risks before making an investment.
