At the current National Australia Bank Ltd. (ASX: NAB) share price, big dividends are on offer. But that's not the only reason to hold NAB shares in a well-diversified portfolio.
- Dividends. According to Morningstar data, NAB shares are expected to pay dividends of $1.98 in the coming year. At today's share price, that's a dividend yield of 6.5%. What's more, it will pay full franking credits. So if you are an Australian resident and hold the shares for 45 days or longer you will get the tax credits, which boosts the after-tax dividend yield to over 9%.
- Valuation. Earlier this week, I wrote an article explaining one technique that anyone could use to value NAB shares. We determined that perhaps at the lower end NAB shares could be worth just $24. If that's correct, NAB shares are currently priced well in excess of their fair value.
While you could rush out to sell your shares, what will you do with the proceeds? If you believe NAB's focus on business banking and retail lending will prove to be a superior way forward it may be worth holding your shares throughout the next market downturn. - Modest growth. Like three of its peers, NAB has made the most of a cushy market environment, which includes strict government regulation and misinformed consumers who believe Debt + House = Financial Success. Over the past two decades, our debt levels have swelled to unprecedented levels and NAB and co. have lapped it up.
Looking ahead, while house prices may slow at times, net migration, a stable government and growing population bode well for modest profit growth. In addition, NAB will have the ability to cost cut and is a leader in business banking. In my opinion, NAB could grow its profits modestly over the long-term.
Foolish Takeaway
At today's prices, NAB shares are not a buy in my book. However, with a potentially tax-effective dividend and long-term outlook, it may be worth holding.
