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3 alternatives to owning big 4 bank shares

The big four banks of Australia are Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

They have been great investments for shareholders since the GFC and may continue to be good investments. However, there is an increasing number of signs that the Australian economy and housing market is slowing down.

If the big four banks suddenly start experiencing a big rise in bad debts, it would be very bad for their profits, dividend and share price. The new government levy doesn’t help matters either.

I don’t think the big four banks are great places for your money at the moment, here are three alternatives which still give some exposure to the banks and lending industry:

Australian Foundation Investment Co. Ltd. (ASX: AFI) (AFIC) is a listed investment company that has been around since the 1920s.

Around 24% of its portfolio is made up of the big four banks, but it also has investments in Telstra Corporation Ltd (ASX: TLS), BHP Billiton Limited (ASX: BHP), CSL Limited (ASX: CSL) and a lot of other shares. It gives investors a lot more diversification, I’d rather own shares in AFIC than directly own big four bank shares.

AFIC is currently trading with a grossed-up dividend yield of 6.03%.

Mortgage Choice Limited (ASX: MOC)

Mortgage Choice is one of the biggest loan brokers in Australia. A lot of the loans it brokers are with one of the big four banks or a subsidiary.

The good thing about brokers is that they receive a trailing commission for the life of the loan without being exposed to the bad debt of the loan itself.

Mortgage Choice has increased or maintained its dividend every year since the GFC. It’s currently trading at 14x FY16’s earnings with a grossed-up dividend yield of 11.24%.

Macquarie Group Ltd (ASX: MQG)

Perhaps the best place to invest for bank exposure is with Macquarie. It does have an Australian loan division, but its best area of growth is its international earnings.

Macquarie has been the best performer of the biggest five banks over the last few years and I think that track record could continue if the Australian economy does indeed hit a bump.

Macquarie is currently trading at 13x FY18’s estimated earnings with a partially franked dividend yield of 5.42%.

Foolish takeaway

I think all three of the above options could be better than the big bank shares over the next two to four years. However, none are at the top of my wish list. If I had to choose one for my portfolio at the current prices it would be AFIC.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited and Telstra Limited. 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.