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Are banks still ‘star income stocks’?

Everyone knows the big four banks in Australia of 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 very good investments for most shareholders who have held on for a long time. They have delivered good capital growth and excellent dividend income since they were first listed decades ago.

However, market commentators have begun to question whether they are still worth holding.

Credit growth is rapidly slowing and may soon be negative. The average household savings rate is at its lowest in many years. Wage growth is very low and getting lower. Household debt is at all-time highs. Banks now have to hold more capital for the same amount of loans. Property prices are starting to go down.

None of these factors are positives for banks, which is why I don’t think banks will beat the market.

I’m always interested in reading different opinions, particularly from people who seem to have an astute understanding of stock opportunities.

Elio D’Amato from Lincoln Indicators was one of the first to identify Rural Funds Group (ASX: RFF) as a good income opportunity.

Mr D’Amato gave his thoughts to the AFR about various matters, including the outlook for dividends. He believes from an income point-of-view a simple strategy is to find businesses that can deliver stable earnings and a good dividend yield.

He expects the banks to maintain dividends in the near future as they go through a period of transition. The balance sheets are in a better position compared to most global peers, the banks haven’t tried any capital-intensive growth strategies and they will become more efficient as time goes on.

As a side note, he thinks the new Telstra Corporation Ltd (ASX: TLS) dividend could be at risk, even after the reduction.

Foolish takeaway

As long as banks can maintain their earnings over the medium term and grow earnings in the long run, they could be very good income stocks. However, if Australia has a true recession and the banks take bad debt hits, the dividends may have to be cut.

I think this top dividend stock is a better choice for income compared to the banks.

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Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Telstra Limited. The Motley Fool Australia owns shares of National Australia Bank 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.

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