I'll admit, it is hard to pass up the big dividend yields of Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) in the current 2.25% low interest rate environment.
I mean, after all, it makes perfect sense to transition money from poor-returning term deposits into dividend stocks yielding 5% and upwards.
However investors pursuing such a strategy need to be very careful. Picking stocks which have strong track records of returning dividends to shareholders is great, but the sharemarket is forward looking. Meaning nothing is guaranteed.
Here are three reasons to avoid buying these two very popular income stocks today…
1. They're not cheap. Despite the past performance of each stock being in stark contrast to one another, neither of these two bank stocks are cheap.
2. Both lack growth to justify their valuations. Last week, Commbank CEO Ian Narev issued a sobering reminder about the likely state of the economy in the years ahead, this has long been evident from the Reserve Bank of Australia's commentary. If both the RBA and Mr Narev are right, it does not bode well for bank shareholders whose shares will be in the firing line. Note: Mr Narev sold $750,000 worth of his own bank's shares earlier this week.
3. There are better opportunities. If your portfolio is overexposed to bank stocks, do something about it. There are thousands of stocks on the market, many of which pay fantastic dividends, many of them will also come with full franking!
