When it comes to dividends, many investors will go straight to the big four banks for their generous yields.
This is hardly a surprise. After all the Westpac Banking Corp (ASX: WBC) dividend not only smashes term deposits and high interest savings accounts, but also the market average 4.3% yield.
So should you snap up shares in Australia's oldest bank today?
I'm not sure you should. Whilst there's no denying that Westpac's trailing fully franked 5.5% dividend is attractive, I think it comes with significant risks.
With its shares trading at a level I would deem to be overvalued, I think there is a danger that an investment today could result in a loss over the next 12 months.
In my opinion the fair value for Westpac's shares at present is around the $30 mark. At this share price Westpac would be trading at close to 13x trailing earnings, which is the average price-to-earnings ratio its shares have traded at over the last 10 years.
Should Westpac's shares fall to my fair value price, it would mean a decline of approximately 12% from the current share price. Even after factoring in the dividend this would equate to a 6.5% loss on your original investment.
What about the other big banks?
Unfortunately I think it is the same story for Commonwealth Bank of Australia (ASX: CBA) and Australia and New Zealand Banking Group (ASX: ANZ), which both look expensive compared to historical levels.
While National Australia Bank Ltd. (ASX: NAB) shares look to be better value by comparison, they still don't stand out as being in the buy zone just yet.
In light of this I think investors would be better off avoiding the sector altogether until their respective share prices come down to more reasonable levels.
