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Is CBA’s big 7.5% dividend yield too good to pass up?

Tristan Harrison
CBA share price

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. 

The post Is CBA’s big 7.5% dividend yield too good to pass up? appeared first on Motley Fool Australia.

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Motley Fool contributor Tristan Harrison owns shares of MAGLOBTRST UNITS and RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Brickworks and Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020