If I currently owned Commonwealth Bank of Australia Ltd (ASX: CBA) shares, I’d consider selling them to buy shares in BetaShares Australia 200 ETF (ASX: A200). Here’s why…
I Don’t Think CBA’s Dividend Is Too Reliable
The big four banks in Australia (and all the other banks, for that matter) are facing increasing pressure on their profit margins and earnings, driven primarily by falling house prices, low-interest rates, and increased scrutiny for Australia’s regulatory authorities.
What’s the impact of this?
National Australia Bank Ltd (ASX: NAB) announced a big dividend cut last week, and there are growing concerns that the other banks could be forced to do the same.
While the RBA decided to hold the cash rate steady yesterday, providing some relief for the banks, a rate cut is looking increasingly likely in the next few months. This could put further pressure on the banks to pass on this rate cut to consumers.
So, with dividends suddenly not looking so stable, what about capital gains? The CBA share price has been on a wild ride the past year but has only grown 8% in the last 12 months and 3% in the last six months.
Basically, I don’t see CBA outperforming the market by any meaningful amount over the next few years. So, I’d rather just invest in a diversified market-based ETF.
Lower Dividends but Lower Risk
The current CBA dividend yield is about 5.75%, but, for the reasons outlined above, I’m not confident it will remain this high. A200, the ASX 200 ETF offered by BetaShares has a trailing dividend yield above 4%. While this is a slight cut, the ETF presents far less risk than investing in a singular bank.
The ETF gives an investor exposure to the top 200 companies on the ASX, including CBA. If CBA cut their dividend, it would have a big impact on CBA investors but would be offset by dividends from other companies for the ETF investors.
As I said earlier, I also don’t think CBA will outperform the market, so capital gains are likely to be similar, if not slightly higher.
The choice comes down to two factors: do you want higher risk and a slightly higher dividend, or lower risk and a dividend yield that still beats almost any high-interest cash account?
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Disclosure: At the time of writing, Max owns shares in BetaShares Australia 200 ETF (ASX:A200).