Is National Australia Bank Ltd.’s massive dividend too good to ignore?

Credit: NAB

The ‘Rule of 72’ says that if you can achieve an annual return of 7.2% for 10 years — and keep the rolling amount invested — you’ll double your money.

Kind of cool, huh?

Indeed, a 7.2% return doesn’t seem too demanding. Especially in Australia, the land of big banks, big dividend yields, and one big bonus: franking credits.

As any good SMSF investor will tell you: “Franking credits are the love child of dividends and tax-effectiveness”.  

Is National Australia Bank Ltd.’s (ASX: NAB) massive dividend too good to ignore?

Based on NAB’s dividend payments over the last 12 months (two dividends of 99 cents per share — fully franked), the bank’s shares currently trade on a trailing dividend yield of 7.57% FULLY FRANKED.

Grossed up for those lovely fully franked dividends, that’s a yield of 10.8%! Try getting that from your b… never mind.

Ceteris paribus (that’s latin financial gobbledygook for ‘all else being equal’), NAB’s dividend could uphold the ‘rule of 72’ and then some.

In fact, IF (it’s a BIG ‘if’) the bank pays the same dividend each and every year between now and 2027, investors could stand to earn a 207% return on their money!

What’s wrong with that?

Of course, if it were that easy to invest in the sharemarket, everybody would be doing it.

Yep, you guessed it, there are many weaknesses in applying the rule of 72 to dividends and investments. Two obvious weaknesses to consider are:

  1. Who knows for sure if NAB will pay a dividend each and every year for the next decade? I don’t. Heck, analysts struggle to forecast one year ahead, let alone 10 years ahead. And,
  2. Capital and market risk are at play. That means NAB’s share price could fall in isolation or along with the market. That could happen today, tomorrow or anytime in the next 10 years. And it’ll take your hard earned along for the ride.

Is NAB’s dividend too good to ignore?

At over 10% grossed up, there’s genuine reason to get excited about NAB’s dividend. Especially if you’re investing through a Self Managed Superannuation Fund (SMSF), which boasts low tax rates.

However, it’s vital to consider the risks and stress test the assumptions on which you base your profit expectations.

Foolish takeaway

While the risk-reward tradeoff has tilted in investors’ favour over the past 18 months, I’m still not a buyer of NAB, Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) or Commonwealth Bank of Australia (ASX: CBA) shares today.

The dividends are hard to pass up, I’ll admit, but I think there are many other better dividend/income shares locally and abroad.  

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

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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