Shares of Commonwealth Bank of Australia (ASX: CBA) are offering a forecast 5.3% fully franked dividend yield.
Compared to the rental yields on property and distributions from bonds, Commonwealth Bank's meaty dividend stands out as a compelling opportunity.
However, as all savvy investors know, shares are riskier than most other investments and care should be taken when making a decision to invest.
Should you buy Commonwealth Bank shares at this share price?
Commonwealth Bank shares currently trade slightly over $80 each, making it a $139 billion company. Since September, its share price has rallied from $69.
At $80 a piece, Commbank shares change hands for 2.3 times its book value (the value of its assets). The book value of a company is determined by accountants assessing the value of each asset, such as Commonwealth Bank's home loans, credit cards and buildings; minus its liabilities, such as deposits and debts owed.
Not only is that well above the Australian banking sector average, at face value, it makes very little sense to pay a price higher than the 'worth' of its assets.
So why do investors pay so much for Commonwealth Bank shares?
The answer: growth… and dividends.
Indeed, there are two ways to make money from traditional share investments: growth in the share price over time, and income in the form of dividends.
We already know the bank's dividend is impressive. However, it is important to remember that the bank's directors could — and should — completely cut the dividend if the business takes a turn for the worse. The dividend is not guaranteed.
Commonwealth Bank's dividend is lower than that of its peers, such as National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), but it is arguably as tempting given the quality of its franchise.
Over the past decade alone the bank's profits have climbed 60% and its share price has rallied. Spurred by strong house price growth (helped by falling interest rates), a bustling economy, good terms of trade and relatively subdued competition, the bank has consistently recorded impressive growth.
Unfortunately, the outlook for growth is never certain. For example, house price growth is expected to slow, the economy is sluggish and competition in the banking sector is intensifying.
Fortunately, Commonwealth Bank's investment in technology and innovation, coupled with its high lending standards, means it is well placed to deal with many such challenges. However, growth will likely be harder to find.
Foolish takeaway
Shares of Commonwealth Bank do not come cheap, which presents a risk that its shares could fall harder than others. However, the bank's dividend yield and modest growth potential over the long-term is impressive, in my opinion.
