In this 2.25% low interest rate environment, Westpac Banking Corp's (ASX: WBC) 5.01% fully franked dividend yield looks too good to be true.
Grossed-up for franking credits, it's an impressive payout of over 7.1%. Meanwhile, a 12-month Westpac term deposit is yielding a maximum of just 2.70%.
It's almost a no-brainer.
Unfortunately, bank stocks are a much riskier investment than a term deposit.
Capital risk is the chance you'll lose some of your investment. Unlike money in a term deposit, no one will stand behind your shares and guarantee your investment.
Whilst I don't think Westpac shares are a terrible investment; I certainly do not believe the 4.4% difference between the yield on its term deposits and shares should compel investors to put their money at risk.
Indeed, at the current market price, I think the chances of an investment in Westpac shares beating the market are very slim. Sure, you mightn't all lose your money but the risk-return trade off isn't convincing.
Here's why:
- Shares aren't cheap.
- Tougher regulations are on their way.
- Competition in the banking sector is higher than it's ever been – and profitability is slipping.
- Unemployment is rising.
- Household debt levels are at record highs.
These are just some of the reasons why now is not the best time for investors to buy Westpac shares.
There'll come a time to invest in Westpac, but as Warren Buffett – the world's greatest investor – famously said, "Be fearful when others are greedy and greedy when others are fearful."
Now is not the time to be greedy.
