Bargain ALERT! Is National Australia Bank Ltd.’s 11% dividend too good to be true?

Credit: NAB

At a fully franked dividend yield of 7.75% — or a huge 11% grossed up — I must admit, I had to take a second look at National Australia Bank Ltd. (ASX: NAB) shares.

Bargain alert

The ‘Rule of 72’ says that if an investor earns 7.2% each year for 10 years, they’ll double their money thanks to compound interest. At NAB’s 11% dividend, and all else being equal, $10,000 could turn into $28,400 after 10 years. Personally, I’d take an 11% return any day.

Too good to be true?

Back in 2014, I also asked myself if NAB’s dividend yield was too good to be true. Fast-forward slightly more than 18 months and NAB’s share price is down more than 25%.  

Source: Google Finance

Source: Google Finance

Sure, the investors who had eyes only for the bank’s dividend yield would’ve done well initially. But if they’re still holding onto the shares today it would have proven to be a very poor investment. The market, or S&P/ASX 200 (Index: ^AXJO) (ASX:XJO), is down 11% in that time.

Foolish takeaway

Predicting short-term share price movements is a (lower-case-f) fool’s errand. Instead, investors should understand the underlying business (in this case, a bank) and make an informed decision whether or not the time is right to buy a company’s shares.

In my opinion, there are too many headwinds facing the banking sector for me to want to buy NAB shares, right now.

Indeed, nobody knows for sure if the worst is over for the NAB share price. However, personally, I'd rather look for other - faster growing - dividend shares to add to my portfolio, such as the one The Motley Fool's expert analysts hand-picked as their best dividend share idea for 2016.

Indeed, our resident dividend experts named their Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is growing and trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

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.

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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