With the Reserve Bank of Australia's interest rates at just 2.25%, investing in dividend stocks can be a great way to produce a meaningful return on your money.
However whilst (undoubtedly) the best way to invest is long term (i.e. five years or more), knowing who'll be the best dividend stock to own right now, let alone in five years, is tough enough.
One of the most reliable ways we can forecast the likelihood of a company's future profitability is by looking backwards, to see how our potential investments have performed over time. Although forward looking analysis is always more important.
Whilst I'm certainly not a buyer of bank shares today, here are three reasons why Australia and New Zealand Banking Group (ASX: ANZ) shares are likely to make a better buy than National Australia Bank Ltd. (ASX: NAB) shares, when prices drop.
- Net Interest Margin
While NAB may have more assets than ANZ, it has achieved a meaningfully lower net interest margin (NIM) over the past five years. A NIM is the difference between the rate a bank pays on deposits and the rate it receives on loans – the higher the better. It's worth noting, NAB is more reliant on wholesale debt markets than ANZ for the funding of its loans.
- Return on equity
ANZ's return on equity (ROE) is also more superior to NAB's. This can, largely, be put down to NAB's struggles with its foreign assets, particularly those in the United Kingdom.
- Credit provisions
When a bank believes the repayments of a debt are in doubt or if the loan hasn't been serviced for 90 days or more, it becomes known as a 'bad' debt. Along with the economy, these are cyclical. They are accounted for against profit. As can be seen from the above graph, NAB's impairment charges have historically been much larger than ANZ's. Whilst ANZ has a higher return on assets than NAB, this concerning data could be a sign of poor quality control on the latter's behalf.
Should you buy ANZ?
At today's prices neither NAB or ANZ are a buy. Whilst ANZ has clearly been a more efficient bank, there is a lot of uncertainty facing the Australian economy which, when coupled with their well-above-average valuations, is concerning. As such, they're best kept on your watchlist, for now.
