Take Advantage of the Banks

Major bank dividend yields are now a hot topic of conversation. As a reminder, here they are at yesterday’s closing prices:

The “Past” column simply takes the last two dividends paid by each bank, and divides by the current share price to give an annual dividend yield.  The “F’cast” column uses an analysts’ consensus increase of 3%.

The after tax yields assume an investor can take full advantage of the franking credits attached to the dividends. This effect will vary, depending on individual circumstances – if in doubt, individuals should check with their financial advisor.

These dividend yields compare favourably to current bank deposit rates. Of course, there is capital risk – share prices could fall or rise. Investors with a long term view can afford to sit and wait for the right price levels, while collecting their dividends. Another risk here is that banks could cut dividends. I think this is unlikely, but traders and investors expecting the Australian economy to deteriorate rapidly would probably avoid this trade.

However, those expecting a stable or improving economic situation can consider a number of ways to profit from this “dividend support” for the banks. Here are some possibilities:


Investors with a view of 12 months or longer could simply buy and hold – either a preferred bank or a combination of the majors. Those managing their own superannuation may consider this strategy. Personally, I favour ANZ on the longer term view, because I believe its Asian strategy will deliver better long term earnings. Some may consider an equal investment in all four majors.

Market Neutral Investing

Investors concerned about the broader market could consider a portfolio comprised of banks, hedged with a short position in an Aussie 200 index CFD.  A straightforward approach is to hedge the value of the portfolio with an equivalent number of CFDs. If
$100,000 is invested in banks, a hedge of $23 per index point ($100,000 divided by the index value of 4,468) is close to value neutral.

Another possibility for bank investors concerned about downside risks is the purchase of put options. The new ASX contract size of 100 shares per put option (previously 1,000) makes tailoring a put hedge easier. While put buyers pay a premium, they receive certainty about the amount at risk until the expiry of the option.


Of course, traders don’t have to collect the dividends to take advantage of the dividend support evident in yesterday’s  bank share price action (Aussie 200 up 0.29%, Financials ex-property up 0.98%, Westpac up 1.73%). Using CFD’s, traders can consider going long individual banks, or any combination of the four. CFD positions receive the cash value of the dividend, but not the franking credits.

Traders may wish to modify or offset their market exposure with a short CFD position, with an index hedge (described above) or a short in another preferred stock, sector or commodity. Examples could include traders shorting materials stocks on a bearish global growth scenario, or traders shorting gold on a “risk on” market expectation. The trading possibilities are almost endless.

About michaelmccarthycmc

Chief Market Strategist - CMC Markets and Stockbroking Regular on ABC, BBC, Bloomberg, Channel TEN, CNBC, SBS and SKY
This entry was posted in Market, Shares, Stocks, Trading and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s