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%.
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.
