National Australia Bank Ltd (ASX: NAB) shares currently boast a massive dividend yield of 6.4% – fully franked, no less!
Grossed-up for those tax-effective franking credits, NAB's gross yield blows out to an incredible 9.1%. By comparison, annual term deposits up to $500,000 at NAB yield just 2.4%.
With almost four times the expected return, you might expect to see investors falling over themselves to get a slice of Australia's third largest bank, but that's not what is happening.
In fact, NAB shares are today trading in the red despite expectations it will divest its UK assets and pay a 99 cents per share final dividend before too long.
In my opinion, it appears as though investors believe the risk of holding NAB shares isn't worth the reward. And if that's the case, I'd agree.
1 blue chip stock I'd buy before NAB
Indeed, there around 100 companies listed on the ASX that I'd consider 'blue chip', and some of them I'd consider superior investments to NAB at today's prices.
For example, last week, I bought Cochlear Ltd (ASX: COH) shares.
The global hearing-aid maker offers a dividend yield of 2.6%, which is far less visceral than NAB's 9.1%. However, Cochlear's 10-year compound annual total shareholder return, which combines share price gains and dividends, is 10.8%. NAB's return is 5.5%, according to Morningstar.
Cochlear's incumbency in the global hearing loss market combined with its ability to reinvest heavily in research and development has undoubtedly provided the conduit for above-average shareholder returns. Importantly, this durable 'competitive advantage' shows little sign of diminishing.
Buy, Hold or Sell
Despite its huge dividend yield, I'd rate NAB shares as a 'hold' at best. Conversely, despite their low relative yield, Cochlear shares appear far better long-term value.
