The Commonwealth Bank of Australia (ASX: CBA) fully franked dividend yield is 5%.
That compares to a Commonwealth Bank of Australia term deposit of 2.25%.
So, the choice is either a 5% fully franked (read 'tax effective') dividend yield or a 2.25% fully taxed interest payment.
To risk, or not to risk?
Now, you are probably sitting back and saying, "that's good, but shares are risky".
You'd be right.
In share market lingo we call that risk the "equity risk premium". Basically, that rule says you should demand more return for the added risk of investing in shares.
There are a few technical bits to it, but really I think it all comes back to some basic things, such as:
- Knowing shares go up and down — a lot. The random ups and downs isn't risk, it's a combination of erratic human emotion mixed with long-term fundamentals (like a company's ability to make more profit)
- Not every stock is a winner. Some shares go down and stay down forever (that's the risky part). So diversify over many different shares.
- The only way to invest in shares is over three years or more, in my opinion. That helps smooth out the ups and downs. It also gives the shares a chance to prove the risk was worth it.
Buy, hold or sell CBA
The difference between the CBA dividend yield and term deposits is around 3%. However, as we know, there are many risks we must consider. For example, what if CBA shares fall more than 3% each year?
In my opinion, the risk right now is that CBA shares are overvalued. I sound like a broken record because I've been saying it for years, but I think there are better dividend opportunities available right now.
