Commonwealth Bank of Australia (ASX: CBA) shareholders find themselves in a peculiar position.
On the one hand, they hold one of Australia's strongest companies offering one of its greatest, most reliable dividends. But on the other, they own a stock which has arguably been squeezed for all it is worth.
Over the last three years, the returns from Commonwealth Bank have been tremendous. Investors who have held the stock since early 2012 have not only recognised a capital gain of roughly 92%, they've also received nearly $13 per share in fully franked dividends. In total, their return equates to almost 120% – a remarkable profit from such a large company in such a short amount of time.
Although the stock is hovering around an all-time high; it is now struggling to extend its gains. The stock is trading at $94.06 and seems unwilling to climb any higher without one important catalyst: further interest rate cuts.
As one of Australia's most popular dividend-paying stocks, income-hungry investors have pushed the stock to unthinkable heights to the point where it appears to have become completely detached from the company's growth prospects. That is, it seems that it is the bank's generous fully franked dividend that is keeping investors interested, not its ability to expand.
It should be noted that I'm not necessarily expecting the stock to plunge in value anytime soon, either. But from today's price, it does not represent good value for long-term investors.
So ignoring the obvious option to buy more shares in the bank, shareholders are left with two options. First, they can choose to hold onto their existing shares in the hope of further interest rate cuts, which could certainly push the stock higher (although any gains from here onwards may be unsustainable).
Alternatively, they can sell the Commonwealth Bank shares that they hold and invest the proceeds in some of the market's other, more attractively priced dividend stocks. I know which option I'd be taking…