Australia’s big four banks have been amongst the most popular stocks on the ASX in recent years. With the exception of National Australia Bank Ltd. (ASX: NAB), shares in each of the major banks have recorded new all-time highs in the last 12 months as investors continue to build their portfolios around them.
So why are investors so attracted to the bank stocks? Here are five of the most familiar reasons why they’re so popular…
1) Safety. Given their size and “too big to fail” status, the big four have always been seen as safer stocks to own. It should be noted however, that with their lofty valuations and exposure to Australia’s inflated housing market, they could actually be amongst the riskiest stocks to own right now, should a market crash occur.
2) The “Professionals” buy them. The banks boast a position in a lot of fund managers’ portfolios, so everyday investors think they’re a good option. However, what some investors don’t realise is that most fund managers are limited to stocks listed in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). Given that the banks make up such a large portion of the index it would be nearly impossible to avoid them altogether. Besides, no fund manager ever lost his job for losing their clients’ money on the banks (i.e. it’s a safe option for the professionals, even if the stocks are wildly overpriced).
3) History. Many investors make their financial decisions based on past performance and assume that it is indicative of what to expect in the future. With the stocks now trading on lofty valuations, this ‘strategy’ could be a huge mistake for long-term focused investors.
4) Invulnerable. Most investors assume the banks are invulnerable to competition and assume that each of the services provided by the big banks are essential to our lives. However, the rapid rise of tech giants like Google Inc., Apple Inc. and Facebook Inc. do pose as a threat to the banks’ future profits, particularly with the introduction of ‘wallet payment’ systems.
5) Yield. In a low interest rate environment, investors love their dividends – particularly when they come with franking credits attached. Each of the big four banks offers a juicy yield. NAB yields 6.1%, Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) both yield 5.6%, while Commonwealth Bank of Australia (ASX: CBA) offers a 5% yield – all of which are fully franked.
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Motley Fool contributor Ryan Newman owns shares in Google Inc (A shares).
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