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National Australia Bank Ltd’s 8.7% yield is worth a look

Shares in National Australia Bank Ltd. (ASX: NAB) are up nearly 2% in afternoon trade today as the S&P/ASX 200 Index (ASX: XJO) (INDEX: ^AXJO) soared over 62 points higher. Could this be a sign of things to come?

NAB shares certainly have their appeal but I believe a large portion of investors buying the over $100 million in shares already traded today are going in search of one thing in particular: dividend yield.

In the current low interest rate environment, its HUGE forecast 8.7% grossed-up dividend yield is truly remarkable. With improving consumer confidence, falling interest rates and a healthy economy, NAB is well placed to benefit from investors’ desire for fully franked income streams.

However, as any seasoned long-term investor will tell you, focusing on a company’s dividend yield alone is a very risky investment strategy. However, having a closer look at NAB, it’s easy to see why it trades on cheaper multiples and boasts a bigger dividend yield than its blue-chip peers such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW).

NAB has a very poor track record. With its disastrous expansion into the UK market many years ago and significantly lower exposure to Australia’s housing market, NAB shares have appreciated just 9% in the past 10 years! Compare that to the performance of Australia and New Zealand Banking Group (ASX: ANZ) which is up over 80%, not including dividends.

An even BETTER dividend than NAB

Until NAB can sort out its mess in the UK, either by paying down its bad commercial property loans or divesting away from the division altogether, I think our fourth biggest bank will continue to underperform the market, even from today’s seemingly low price.

However, there is some good news! Every year, Motley Fool investment advisor Scott Phillips hand-picks 1 ASX dividend stock with outstanding potential. Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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