There’s More to Dividends Than Banks

“Bank dividend cuts likely as economy worsens” – AAP

The story was based on research from banking analyst Brian Johnson. He’s now at Credit Lyonnais’ research division in Sydney. Previously he was banking analyst at JPMorgan, where he was a mighty supporter of Macquarie Bank, tipping it to reach $120 a share before the market crashed.

But now he’s turning ‘Queen’s evidence’ against the banks. He’s become the Benedict Arnold of the banking industry. A turncoat no less.

According to Johnson the banks aren’t looking very good. In fact, the report states that he believes banks’ share prices could re-test the lows of several months ago.

That may surprise the mainstream press, but it doesn’t surprise us at all. We’ve stated in these pages for some time that the banks look rotten. We wouldn’t touch them with a barge-pole. And we see no reason why anyone would ever want to invest in bank shares again.

When you look at the risk/reward profile of them, the numbers just don’t stack up as a risk worth taking.

Look at it this way, it takes time for the full effects of an economic downturn to filter through to the banks. The hit they’ve taken to their earnings and balance sheets so far has been due to losses made on the wholesale trading markets.

Bigger problems will come when the retail and business customers start to feel the pinch going into 2010. Rising interest rates, rising unemployment, rising cost pressures, etc.

But here’s news for you, there’s more to dividend paying stocks than the banks.

Sure, non-banks are going to be impacted by a continued economic downturn as well. But providing the business is flexible enough, and is able to control costs, there are plenty of other shares where you can pick up an income stream.

And they are shares in companies that you don’t need a PhD from Harvard to decipher the balance sheet.

Now, I won’t give away details of the first six stocks to make it into my new income newsletter – Australian Wealth Gameplan – but it wasn’t hard to avoid the banking sector.

Let me put it another way, the broader S&P/ASX200 index is trading on a dividend yield of around 5%, plus hopefully you’ll get some capital and dividend growth. That’s not bad considering the alternative of a cash investment. Yet even the riskiest of the major banks – ANZ Bank – is trading on a yield of only 6.2%.

Based on all the rubbish the banks are still carrying on their books, investors really should demand a much higher yield. But in your editor’s opinion there isn’t a yield big enough that would convince us to buy any bank in any country.