Banks, As Safe As Houses

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

By Peter Switzer, Switzer Super Report

Tuesday afternoon I bit the bullet and bought bank shares and gave myself a pat on the back across Wednesday and Thursday when the stock market went up 3.3%. It was nice to have my judgment validated, but in all reality, what the market does now, won’t change the price I bought the banks at. And provided no shocking recession comes about, and ruins dividends for a longer period than history says it should, then I can be happy that I have bought at an OK price.

Of course, the bank shares and the ETFs I bought in 2009 will forever be better buys than the ones last week but that’s the same when it comes to the properties I’ve bought as well.

A Paddo cottage that cost me $54,000 in 1979 was one my greatest buys of all-time but I have other great properties bought later, which were also very good buys. In fact, if you don’t want to be a short-term trader inside your SMSF, I think you should adopt a property approach to shares.

My reasoning

Let me walk you through why I bought the banks last week and explain my point.

Using Commonwealth Bank ((CBA)), I looked at its all-time closing high, which was $73.49 on May 20, and seeing the stock at $65.88 at the time, there was clearly a $7.61 difference. And so if the bull market that lies ahead can at least take the stock back to its high, then I’d gain around 11.5%.

Also the dividend yield I calculated was around 5.4%, but with franking credits it would be closer to 6.5%, and when I retire with no tax inside my SMSF, it would be around 7.7%.

Therefore there was a potential 17-19% to be made on a good company such as the CBA.

If anyone could buy a property that returned almost 8%, plus the chance of capital gain, they would be mad to ignore it.

Could the dividends fall? Yes. But history says they don’t fall for long. In the GFC, the CBA’s dividend fell for one year, however by 2010, was higher than the dividends paid pre GFC. And anyone who has seen a chart of its dividends since floating – 40 cents for 91/92 to $3.34 for 2011/12 – knows it screams out that playing dividends makes enormous sense.

Now I expect volatility for stocks until November, or maybe a little before then, and that could mean my share price could go lower, but you know property prices do fall. However, if you’re not a seller and you’re still receiving rent, then property prices will recover and go higher.

With stocks, as most of you know, I like 20 stocks in my SMSF portfolio to reduce my exposure to one CEO’s stupidity, or to a dumb government decision, to only 5%.

Sure, if the bank’s share price goes lower, I could buy more to dollar cost average to lower the price and raise the yield (or rent) I receive, but one of my other jobs now is to hunt for other great dividend paying stocks.

Forward outlook

At the moment, my speculative play is to gain some exposure to small cap stocks, which I think will spike later this year because of the low dollar, low interest rates, a new Government and an improving global economic outlook.

I’ll tell you how I’ll play this hand next Monday, as I think I have time on my side.

One final point – did I only use CBA to buy the other banks? No, I looked at each one individually, like I would when buying a property. I like CBA and Westpac ((WBC)) for local reasons. I think ANZ’s ((ANZ)) Asian play is wise and I believe National Bank ((NAB)) is the improver in the pack.

Peter Switzer is the founder and publisher of the Switzer Super Report, a newsletter and website that offers advice, information and education to help you grow your DIY super.

Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms