Is the 7.5% grossed-up dividend yield from Commonwealth Bank of Australia (ASX: CBA) too good to pass up on?
If you compare that potential income from CBA against what you could get from a bank account – at best around 2% – you'll see there is a big difference of 5.5% or more depending on the savings account.
I can understand if you don't want to eat into your capital in the bank, you spent your whole life building up your nest egg. In this situation CBA isn't a bad option if you're just trying to maximise your income. I think CBA could be a more reliable dividend choice than Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB). CBA has been the only major bank not to cut its dividend or franking level in the past year.
But is 5.5% worth taking on the capital risk with CBA shares (or any shares)? Banks are not known for being particularly defensive. Indeed, in tough economic times banks are some of the ones to suffer the most.
At the moment banks aren't growing much with low total system credit growth, higher capital requirements, low Australian economic growth and continuing customer remediation from the financial services royal commission.
If I were going to put my money into the share market, where you'll be facing share volatility, I'd either want to choose shares with a higher return potential like Webjet Limited (ASX: WEB) & Magellan Global Trust (ASX: MGG) or ones with more defensive characteristics like Brickworks Limited (ASX: BKW) & Rural Funds Group (ASX: RFF).
Foolish takeaway
CBA is trading at 17x FY20's estimated earnings. I think CBA is worthy of trading at a bit of premium to the other banks, but I think it's fairly expensive for the risks we're taking by going into equities. It wouldn't be my first pick for dividends.
