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Banks Are A Great Investment, But Do It Right!

FYI | Jun 01 2016

By Peter Switzer, Switzer Super Report

It beats me how experts commenting in the media assume we’re all the same. According to them, we all want to invest in companies that rise in share price rapidly and if they pay a dividend, well that’s good as well.

And while a lot of investors are like that, it doesn’t mean all are like that or that they should all be like that.

It’s OK if you want to be a punter to go for growth companies and try to time it. On my show, I have expert fund managers, who tip a company that does well but then falls. And when I ask them what happened to their tip, they say they sold out of it before it fell!

That might be true and might have been driven by the value they placed on the company. And when it went well over it, they sold. However, how many amateur investors have the skills to do this? Answer? Not many. By the way, a lot of fund managers can’t do that timing piece well all of the time either.

This reality makes a lot of investors opt for yield. If you take the All Ords Accumulation Index, it shows that the average return per annum over a decade is around 10%, of which half of those returns are dividends. So being a dividend-stock hunter isn’t a bad idea, if you’re happy with a 10% per annum return. And who shouldn’t be?

Of course, picking your own group of dividend-payers is also easier said than done but the banks and Telstra are damn good starts. These added to other historically consistent dividend-payers plus franking credits should produce a good annual return.

And that’s why I still like the banks but you need to see them for what they are. They are more risky ‘term deposits’ but if you can live with the ups and downs of your capital, then the pretty good income stream becomes the main game.

Let’s look at NAB for starters to prove my point. Its 52-week range is $23.82 to $33.67. It’s now around $27.30 and if you go back to early 2009, after the GFC-crash, it was $15.08.

So when it got to $33, the capital gain was over 100% and it still is 81% and there has been seven years of dividends plus franking credits.

The CBA went within a whisker of $100 last year and I bet in my lifetime it will crack the century but I might see it at $40 again, if a crisis-created crash comes along again.

Furthermore, if we beat the 6000-level over the next 12 months, which a lot of experts expect, I bet you that the banks will be a part of that index rise — they have to because they make up such a large part of it with the Big Four taking up 25% of the index.

You invest in banks for the dividends and yes, even if those dividends do end up being cut, with franking credits they’ll still be better than term deposit rates by a country mile!

Even before the latest rate cut from the Reserve Bank, Elio D'Amato, chief executive of share analyst Lincoln Indicators, argued that the dividend trade story has at least 12-18 months to run but I reckon it will always be a fair-to-great play, depending on what price you bought the stock at.

Clearly, buying CBA at $95 or so was a gamble, but even at that level, dividends plus franking credits beat term deposit rates. At current levels it’s a no brainer.

Right now there are some analysts tipping bank share prices could go lower from here but with the economic outlook for the Oz economy looking pretty sound, I see any significant fall in the share prices as nothing more than a buying opportunity.

This year, the banks have had everything thrown at them: from fears that they were over-exposed to the miners, to a big short comparison with the US, to a housing crisis and a Royal Commission. All these accusations assume that the RBA and APRA are asleep at the wheel, which I don’t think is true, given the forced capital raisings of late that actually explain why the share prices of our banks have dropped a peg.

At least five things make me comfortable about our banks — their dominant size, the taxpayer backing, the fact we pay back our loans, the calibre of regulation and the underlying strength of the economy.

The debt ratings agency, Fitch, basically agreed with my view, though it pointed out that one day fintech threats could undermine the banks’ profitability. But even when that comes along as a threat, who will buy out the fintech disruptors? I’d say the banks!

Fund managers can bag the banks because they might want higher returns but if you’re happy with 7% plus then bank stocks still appeal. And remember, if you can’t take the volatility of bank share prices going up and down for the sake of dividends, then you might have to look at less rewarding, more stable investments, like term deposits or a conservative bond fund.

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 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.

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