Another banking bubble on its way?

As interest rates drop, bank stocks become riskier for many reasons, here are some alternatives.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

RBA governor Glenn Stevens has signalled there is more room for interest rate cuts as the economy slows but some investors may be fooled into thinking that the benefactor of lower rates are bank stocks. It's not as it seems.

Bank stocks are renowned for high dividend yields and safety and especially when the interest rate is expected to drop further, everyday investors think the switch from a 3.5% interest bearing account to a 5% fully franked yield is easy money. It's not.

At current prices, not one of the big four banks are 'cheap' by any valuation. Commonwealth Bank (ASX: CBA) will be expected to pay a dividend slightly below 5% fully franked but that's if you hold onto them for an entire year. In the meantime, its price could drop further than 5%, just like it did from mid-May to June.

Timchart

Source: Google Finance

NAB (ASX: NAB) has the highest fully franked dividend yield (5.9%) followed by Westpac (ASX: WBC) (5.6%). At current prices ANZ (ASX: ANZ) offers a dividend of 4.9% but can afford to do so given its long-term growth prospects, however it is not immune to investors' expectations and yield chasing.

Better alternatives

Not only do the banks offer higher share prices, the next few years are unlikely to hold the same amount of growth as in the past 10 years. The contraction in mining investment, tighter lending conditions and fewer depositors put our banks at risk. A slowdown in our economy hurts our banks. Currently, Myer (ASX: MYR) and Metcash (ASX: MTS) offer some of the best dividend yields on the market and are well priced.

Foolish takeaway

Traders could find value in current bank stock prices but this Fool believes short sellers will find more. Investors transitioning from term deposits and bank accounts to stocks should consider that interest rates may stay low for a long time, in such a case it would be wise to find stocks cheap that can be held for a longer term.

Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

More reading


Motley Fool contributor Owen Raszkiewicz owns shares in Myer and Metcash.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »