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ANZ’s 4.9% dividend yield: Tempting, but worth the risk?

What bank bubble?

Graham Hodges, deputy chief of Australia and New Zealand Banking Group (ASX: ANZ), recently pooh-poohed the rumors of a bank shares bubble, telling The Australian Financial Review: “We have had a pretty solid run. We are at the higher end of historically where we have been… It doesn’t mean it is going to suddenly fall away quickly, because there is solid earnings and I don’t think there is any shock for earnings in the near-term horizon. That is why I would say it is reasonably sustainable and I don’t think it is a bubble”.

What’s indisputable is that bank shares have been on a massive run in the last twelve months. Shares of Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ have packed on 35%, 46%, nearly 30%,  and 30%, respectively, versus a 22% rise in the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO). Simply click the chart for a larger view.

Bank shares vs. the AXJO

But while Hodges attributes this run to “solid earnings”, it’s hard not to conclude that investors’ urgent search for yield in the face of falling term deposit rates — rather than, or at least in addition to, these banks’ profit growth is behind the rapid price appreciation.

Today, ANZ shares trade for 2.5 times price to tangible book and 15 times earnings, while in the last 12 months, ANZ grew earnings at around 7.5%. Is this rate sustainable — and are ANZ shares a good bet?

It is (and they are) if you expect everything to go wonderfully in the Australian economy for the foreseeable future. So much so that you feel perfectly comfortable with highly leveraged institutions that could topple the minute things go sour. You see where I’m going with this?

Yes, ANZ’s hefty, fully franked dividend of 4.9% looks more promising than today’s term deposit rates. But the downside risk could be substantial, and you may want to look elsewhere for yield and income.

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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