For many investors transitioning money from low yielding term deposits, with rates of say 3.5% per year, to big bank stocks which yield twice as much, is a no-brainer.
Westpac Banking Corp (ASX: WBC), Australia's second largest bank by market capitalisation, is a favourite dividend stock amongst income investors. Having achieved an average annual total shareholder return (capital gains plus dividends) of 11.8% over the past decade, it's easy to see why.
That turns a $10,000 investment into over $30,000.
Right now however there's still a number reasons to take a second look at Westpac. For example its exposure to Australian property, household credit, wealth management and Asia afford it conservative long-term growth prospects.
Compared to its peers, such as National Australia Bank Ltd (ASX: NAB), Westpac maintains good profitability, with an efficiency ratio of just 41% (below 50% is good) and a net interest margin of 2.08%.
Westpac's emergency capital buffer against market crashes – known as a Common Equity Tier-1 (CET-1) ratio – was reported at 8.97% in the September quarter, the highest amongst the big four banks.
Modest growth and a sound financial position should enable it to continue paying out solid fully franked dividends in the years ahead. That's despite the recent Murray financial system inquiry which will likely result in all banks being forced to adhere to higher capital levels.
Looking in 2015, analysts are forecasting a dividend equivalent to 5.7% of Westpac's current market price, or 8.1% grossed-up for franking credits.
Whilst a big dividend yield is great however its vital investors don't overpay for shares or they risk its share price being sold off. And today's prices that's a very real possibility…
Want to know whether you should buy, hold or sell Westpac shares?
