Banks’ savings accounts pay just a fraction of the income that investors get from their shares.

Big bank share dividends smash savings account interest rates, but are they worth the risk?

BIG banks are paying their shareholders incomes five times higher than the 2 per cent interest that savers are earning from their bank deposits.

However, it’s not a case of new-found generosity among the Big Four banks after their recent humiliation at the Royal Commission. It’s caused by their share prices plunging so low that the dividend income yields have jumped to 10 per cent after tax.

Share specialists say the high dividend payouts have made investors wonder whether now’s a good time to buy.

However, ongoing problems plaguing the sector could push the share prices and dividends lower in the coming months, they say.

CMC Markets chief market strategist Michael McCarthy said people should not compare bank shares with bank deposits. He said shares were much riskier, although their dividends provided a buffer “in case the shares get knocked around more”.

Banks’ savings accounts pay just a fraction of the income that investors get from their shares.

Banks’ savings accounts pay just a fraction of the income that investors get from their shares.Source:AAP

Mr McCarthy said CBA had shed one third of its value since 2015. “That’s very steep for Australia’s largest stock — if this keeps happening it might not be Australia’s largest stock for much longer.

“The share prices are lower risk than they used to be, but there’s very clear downward momentum. It’s not for the faint hearted — I’m holding them but I’m not buying.”

Last week the Big Four banks — the Commonwealth Bank, Westpac, ANZ and NAB — were paying dividend yields between 6.3 and 7.7 per cent. Once their 30c-in-the-dollar franking tax credits are added, the yields are 9-11 per cent.

Factors that are hurting the banks’ outlook include:

• A weaker housing market;

• Hundreds of millions of dollars to be refunded to customers after damning Royal Commission findings;

• Potential tough new rules as regulators harden up.

Baker Young Stockbrokers managed portfolio analyst Toby Grimm said bank profits and dividends could fall 5-10 per cent in the next couple of years.

“There’s no suggestion of any property crash that would threaten their balance sheets,” he said.

“We like them and are holding them long term but there’s still a lot of uncertainty out there.

“Bad news is still going to keep trickling through and there could be better buying opportunities in late 2018 or early 2019.”

Chris Conway, a senior investment adviser at investors’ newsletter Marcus Today, said he did not expect share price or profit growth from banks in the year ahead.

“But there’s a price — we are probably close now — where the dividend is such that you need to take a look,” he said.

“I would have thought that the shock value from the royal commission punch in the face has passed.”

Mr Conway said bank dividends were unlikely to fall too far because banks “are still going to generate a lot of cash”, but he suggested holding off until share prices bottomed out and started climbing again.

 

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