Thanks to a plummeting share price, Westpac Banking Group (ASX: WBC) shares are changing hands at a trailing fully franked dividend yield of 6.09%.
Grossed up for those tax-effective franking credits, Westpac's comparable yield blows out to a whopping 8.7%.
Now let's see what's better: a dividend yield of 8.7%, or a 'high-yielding' term deposit from the same bank offering 2.4% interest?
Source: Westpac Website, 3 September 2015.
Not Carte Blanche
Unfortunately, investors should think carefully before taking money from a term deposit and investing in bank stocks.
Yes, they purport to offer far superior returns. However, they also come with a far higher level of risk.
For example, a share price can fall for extended periods of time – sometimes permanently (however unlikely that may be, it's still a risk) – resulting in a capital loss. Annual dividend payments to shareholders can also be partly, or entirely, cut.
Source: Website dividend history. Ordinary dividends only.
That's in contrast to a Big Bank term deposit which is government guaranteed up to $250,000 and is one of the safest forms of investment.
Too good to be true
As a long-term investor, I know I don't have to jump at every opportunity in front of me because I have time on my side. And given the backdrop of a slowing economy, there's a chance Westpac shares could come under further selling pressure in the near future as it seeks to raise more capital to meet regulatory requirements and competition increases.
Although I'm not suggesting Westpac's dividend will be cut, or it's a bad business, in investing what seems too good to be true usually is.
