Some investors would argue that now is the best time to buy shares of Commonwealth Bank of Australia (ASX: CBA).
The shares are now trading at just $75.31 – up from a near two-year low price of $71.42 yesterday, but still more than 22% below their all-time high, recorded in March this year.
At the same time, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is trading near a two-year low after narrowly avoiding a 'bear market' yesterday with plenty of Australian companies trading in bargain territory.
With that in mind, many investors have come to expect an official interest rate cut when the Reserve Bank of Australia meets next week, or at least before the end of the year to ease the market's tension. That could take interest rates to just 1.75%, or lower, making high-yield dividend stocks all the more appealing.
Source: Company reports; Yahoo! Finance
As can be seen in the chart above, the stock's recent fall has had a positive effect on the company's dividend yield. Offering $4.20 per share (fully franked, mind you), the stock currently yields just under 5.6%. Grossed up for tax credits, that's a total yield of 8%.
It's pretty tough to argue against a yield like that, but there is so much more to investing in companies than simply looking at a dividend.
There are strong headwinds facing the bank industry (and arguably, the economy as a whole) which would explain the heavy selloff recently. The banks have already raised a combined $16 million in capital (with some experts suggesting they'll need another $25 billion), while earnings growth is becoming much harder to come by – think slowing loan growth, rising bad debt charges and tougher competition.
Although Commonwealth Bank has generated enormous returns in the past, there is no guarantee that it will continue to do so from its current price tag. In other words, any capital losses from a falling share price could more than offset potential gains from the dividend stream.
Despite its recent tumble, I believe investors could do far better over the long term by looking elsewhere. After all, the great thing about dividend-paying companies is that as the share price falls, the yield rises — a perfect combination in light of the market's recent crash.
