Is now a good time to buy Westpac Banking Corp shares? 

Credit: Kiwiteen123

As of Friday’s market close the shares of Westpac Banking Corp (ASX: WBC) had fallen over 7% this year. With a further decline occurring when the market reopened this week in response to Friday’s sell-off on Wall Street, it truly has been a horror start to 2016 for its shareholders.

Westpac shareholders are by no means alone here. All the major banks are down during the same time period. Commonwealth Bank of Australia (ASX: CBA) is down almost 8% and Australia and New Zealand Banking Group (ASX: ANZ) almost 11%.

I believe this highlights the importance of having a diverse portfolio full of shares from a range of different industries. A diverse portfolio of course does not guarantee against a loss, but goes some way to assisting in helping you reach your long-term financial goals, whilst minimising your overall risk.

But I still see the banks as being an integral part of a diverse portfolio and at the current price Westpac is my preferred choice right now. With the Westpac dividend now yielding a fully-franked 6% from a healthy payout ratio of 73%, it has become a very attractive investment.

When the dividend is yielding as much as this, I believe there is a strong chance that its appeal to a wide number of income investors will create buying pressure that prevents the shares from dropping much further. So this means that now might be a good time to consider taking a position, before the opportunity potentially disappears.

It is worth noting though that there are concerns floating around the market that the banks may be forced into further capital raisings this year that could cause shareholder dilution and a drop in share price. Some market commentators have even speculated that Westpac may be forced into cutting the dividend in 2018 in order to retain more earnings.

Right now the payout ratio (this is the dividend divided by the earnings per share) is at what I believe to be a reasonably healthy level. If we were to see it rise up towards the 90% level then I would start to have concerns over a dividend cut, but for now I feel the dividend is safe.

Foolish takeaway

The market sell-off has certainly presented investors with many tempting investments and none more so than that of Westpac shares in my opinion. The high dividend that analysts still expect to grow by around 3% per year for the next two years, and potential capital gains as it reverses back towards where it has dropped from make it almost too attractive to turn down in my opinion.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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