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Is Commonwealth Bank of Australia’s 7% yield too good to be true?

Australian investors remain as attracted as ever to Commonwealth Bank of Australia (ASX: CBA) shares despite them being widely regarded as overpriced or ‘priced for perfection’.

The stock has trended marginally higher today after the Reserve Bank of Australia confirmed that it would leave the cash rate on hold at 2.5% for another month, as has been expected. When compared to the lacklustre returns that could be recognised from “risk-free” investments, investors would much prefer the grossed up 7% dividend offered by the bank.

The same could be said for other high yielding stocks such as Telstra Corporation Ltd (ASX: TLS), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) which have also appreciated in price today.

However, investors need to consider more than just the yield on offer when buying shares. As previously mentioned, each of the big four banks are trading at expensive prices and could be amongst the hardest hit in the event of a stock market correction. That is perhaps especially the case for Commonwealth Bank and Westpac which are both heavily exposed to Australia’s inflated housing market.

Another factor investors need to consider is whether the banks can maintain their generous dividend payouts. Commonwealth Bank is currently paying a total of $4.01 per share but new capital requirements could seriously impact its ability to maintain that in the medium term.

If it's high dividend yields that you're after, I would strongly urge you to consider other alternatives which are not quite so expensive. As a perfect example, The Motley Fool's top analysts have recently named their #1 dividend-paying stock for 2014-2015 which not only offers a grossed up 6.4% dividend yield, but also strong growth prospects moving forward.

For instant access to our FREE report which reveals the name, code and all the important details of this ultra-promising ASX stock, simply click here now.

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

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