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Which bank should you buy?

Bank stocks are dropping and yields are going up, so which one is best for you?

Yield

Westpac (ASX: WBC) was the Aussie company that most recently joined the $100 billion club, but with the fall of the S&P/ASX 200 (ASX: XJO) (Index: ^AXJO) in the past seven weeks, its market cap has dropped to $90 billion. There’s no doubting Westpac has fallen hard in recent weeks, but that’s great news for income investors. At current prices, its dividend is 6% fully franked!

Out of the big 4, NAB (ASX: NAB) is the only bank that surpasses the 6% dividend mark and offers investors a fully franked yield. With overseas conditions hard, particularly in the UK, the company undertook a huge restructure which it hopes will see it save up to $800 million in coming years. With a very competitive mortgage rate locally, NAB deserves a spot on your watchlist.

Safety

Investors would be hard pressed to find a safer investment than Commonwealth Bank (ASX: CBA). With a market capital of $110 billion and a solid 5.1% dividend, people who fret over the ebbs and flows of market cycles are able to sleep at night knowing that their money is safe and sound. When the stock recently shot up to record highs, investors had to wonder how sustainable those levels were, especially with little growth forecasts for the immediate future. In the past 10 years, CBA shares have risen 140% not including dividends. Will the next 10 years be as profitable? Probably not without the huge amounts of mining investment, but the odds are in its favour that it will be operating at higher revenue and profit.

Growth

Investors who want growth and aren’t afraid of a little bit of volatility should look at ANZ (ASX: ANZ). It is the only one of the big 4 with a potentially large upside, having already established itself in Asia and beyond. In addition, the Fed’s recent pullback from its quantitative easing strategy can also be seen as a good thing for the bank. Margin pressures weighing in on Asian bank earnings could turn around as a result of the pullback, and the ANZ is the best placed to benefit out of any of Australia’s banks. It pays a 5.1% fully franked return and will open today at $27.65.

Foolish takeaway

No matter which bank you buy, if you’re in it for the long term the odds are in your favour. The bank’s recent gains were unsustainable at current earnings and investors can now purchase stocks with a healthy buffer or discount from those prices. Buying shares at lows and selling at highs is the best way to make money but predicting those peaks and troughs is near impossible. Focus on buying stocks that have a larger upside, and remember, the more risk, the more return.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Owen Raszkiewicz owns shares in ANZ.

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