The Commonwealth Bank of Australia (ASX: CBA) share price appears quite expensive while shares of Macquarie Group Ltd (ASX: MQG) add diversification and growth potential.
Why avoid CBA shares?
There are two reasons I would look to other dividend stock ideas before considering CBA shares in 2017, including:
1. Shares appear expensive: At today's prices, CBA shares offer a handy dividend yield. But comparing its valuation to its peers, and in an absolute sense, CBA shares appear to trade slightly above fair value. I'd consider buying CBA shares if they were closer to $70.
2. Exposure. Many Australians are already significantly exposed to the Australian financial system. Some readers may be employed in finance, have their mortgage with CBA, have their super invested in Australia and have an investment portfolio consisting of Aussie property or shares. What's more, CBA shares have performed extremely well over the past two decades, so chances are, Aussie banks are already a big part of investors' portfolios.
Who is Macquarie?
Macquarie is also an Australian bank, with a market capitalisation around $30 billion. However, Macquarie is different to Commbank in a few important respects.
Firstly, it is an investment bank. Although it offers mortgages and loans, it operates in many different markets. From US stock research to aeroplane finance, Macquarie does it all.
Importantly, Macquarie is also diversified geographically. It has operations on every major continent, including the US and Europe. That affords it some risk benefits for the average Australian portfolio. While global markets can be volatile — and the bank's share price will at times rise and fall dramatically – the long-term fundamentals of the business appear promising.
When it comes to valuation, Macquarie's share price also seems a lot cheaper than CBA's. Moreover, the company's shares offer a 4.8% dividend yield, with partial franking.
Foolish Takeaway
If you have more than 25% of your entire portfolio invested in the Australian financial sector, that's probably too much, in my opinion. Don't get me wrong, you don't need to build a portfolio of 100 shares to be successful, and there is nothing wrong with backing your research. However, it's also important to the consider the risk-reward tradeoff. Given Macquarie's diversified exposure, valuation and operating segments, I think it worthy of consideration for investors seeking long-term income and growth.
