At a time when interest rates were sitting at record low levels and investors wanted more bang for their buck, Commonwealth Bank of Australia's (ASX: CBA) incredible dividend yield was one of the primary reasons investors were so attracted to the stock.
At one stage, the bank was offering an incredible fully franked dividend yield of around 7% and shares were priced at under $50 apiece! No wonder the stock became so popular…
Oh how things have changed since then… The stock is now sitting just below an all-time high of $82.44 and trading on a much lower dividend yield of just 4.6%. Although that is still more than the returns offered by most term deposits or government bonds, it just isn't enough to make Commonwealth Bank a good investment for today's money.
Here are three reasons why…
- Commonwealth Bank now offers the lowest yield of any of Australia's major banks. In comparison, Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) offer fully franked yields of 5.2%, 5.8% and 5.1%, respectively.
- What good is a 4.6% dividend yield if there is very limited potential for capital gains? Currently priced at $81.77 and trading on a P/E ratio of 15.4, it is very difficult to see the shares outperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) in the medium to long terms.
- On that note, Commonwealth Bank is the most exposed to Australia's housing industry out of any of the big four. While this is advantageous in a low interest rate environment, it is also a huge risk when interest rates (and bad debt charges) inevitably rise. At this stage, it is looking unlikely that Commonwealth Bank will be able to deliver earnings growth on the levels expected by investors.
Another reason why I wouldn't be touching the bank's shares right now is that there are so many better opportunities to take advantage of right now!
