Research has shown that many self-managed super funds (SMSFs) hold shares in one or more of the big four banks.
In fact, many SMSF portfolios virtually hold shares in the banks and cash as their only investments. And we've seen the share prices of the banks falling more than a third in the past year, which means big paper losses for those investors.
Australia and New Zealand Banking Group's (ASX: ANZ) share price has lost 36% over the past 12 months, or roughly $13.00. That is in no way is offset by dividends of $1.81, even after franking credits are added in.
Commonwealth Bank of Australia (ASX: CBA) has seen its share price lose more than 20% or more than $19 since March 2015. Dividends over the past year total $4.20.
National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have lost 32% and 23% respectively – although NAB has demerged its UK banking business into CYBG PLC CDI 1:1 (ASX: CYB), currently priced at $3.95.
The capital losses in the banks' share prices illustrate that investors should have a much more widely diversified portfolio. Research has shown that most investors should hold between 10 and 20 shares in their equity portion of their portfolio.
That's particularly important when the big four tend to see their share prices mostly move in sync.
Here are three options for investors looking for income and more diversity for their portfolio.
Tamawood Limited (ASX: TWD)
As recently as February, the home design and project management company confirmed that it would pay a 25 cent fully franked dividend in the 2016 financial year. At the current price of $3.11, that's a yield of 8% or 11.4% when franking is included. Investors should also know that the company has averaged yields of 9.7% over the past decade.
Dicker Data Ltd (ASX: DDR)
Dicker Data is one of Australia's largest distributors of computer hardware, software and related products and currently pays a trailing yield of 9%, fully franked. Dividends are paid quarterly, and the company expects to pay a total of 15.4 cents in the 2016 financial year – equating to a yield of 10.3%, or 14.7% grossed up for franking credits. Dicker Data is still led by founders, David Dicker and Fiona Brown, and both hold substantial stakes in the business.
Thorn Group Ltd (ASX: TGA)
A fully franked yield of 6.8% makes Thorn Group – the owner of Radio Rentals – our third pick. Thorn has diversified into consumer and commercial finance, and receivables management – and expects improved performances from these divisions in the second half of the 2016 financial year. Consumer Leasing (Radio Rentals) continues to be the primary growth driver and continues to hum along nicely.
Foolish takeaway
Diversity doesn't mean having to sell your shares in the big four banks, particularly after recent falls and if you have a long-term investment horizon. But it does mean allocating a smaller portion of your portfolio to the big four banks. Smaller companies also offer the potential for much more growth than the large banks, which struggle to generate double-digit growth given their dominance of their market.
