3 reasons to ignore Commonwealth Bank of Australia’s 4.6% dividend yield

Commonwealth Bank of Australia (ASX: CBA) has for a long time been a favourite amongst investors looking for solid dividend yields.

As one of Australia’s sturdiest corporations, it has survived through thick and thin, and while interest rates have remained so low, its juicy fully franked dividend has appealed to many. Indeed, at one stage in 2011 it was yielding roughly 7%! When compared to the inferior alternatives, it’s no wonder it gained so much attention…

However, the stock has rallied strongly since that time, heavily outperforming the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) and each of its primary competitors, being Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).

As a result, its dividend yield has gradually shrunk with the bank now offering just 4.6% fully franked. Here are three reasons why that yield is no longer enough…

  1. While the stock’s rally in recent years has benefited plenty of Aussie shareholders, the stock is now considered to be overpriced. It trades on a forward P/E ratio of 15.3 and a Price-Book ratio of 2.9 and earnings could well come under pressure in the near future when interest rates rise, it seems there is limited upside potential for capital gains in the long term.
  2. In fact, the stock could just as likely decline in value in the short-to-medium terms. In that case, any gains recognised from the dividends received would be offset by the capital losses endured.
  3. Although a 4.6% fully franked dividend is nothing to be sneezed at, there are plenty of better opportunities that can now be taken advantage of! You only need to look as far as Telstra Corporation Ltd (ASX: TLS) or Insurance Australia Group Limited (ASX: IAG) to see that they offer even greater yields at 5.5% and 6.2% respectively.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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