National Australia Bank Ltd (ASX: NAB) shares currently offer investors a 6.8% dividend yield. So, should you reinvest the proceeds in NAB or look elsewhere?
About NAB
NAB is one of the four largest financial institutions in Australia in terms of market capitalisation, earnings and customers. In 2018, it was Australia’s largest lender to businesses and has operations in wealth management and residential lending.
Why I’d Look Elsewhere
NAB shares still pay a hefty dividend despite the large cut back in April
, so it still looks like a viable option for dividend income. However, I’d be looking for another place to reinvest the dividends.
Why?
Banks are facing several challenges right now, including interest rate cuts, falling house prices, the possibility of bad debts increasing and pressure on net interest margins (NIM).
There is a growing concern for the banks’ profits. Therefore, they might not be the best options for growth.
Growth Shares
One possibility is to invest your NAB dividends in growth shares. Holding onto the NAB shares could provide ongoing income from the high dividend yield, even if dividends are cut. Adding growth shares to your portfolio could provide capital gains.
The hardest part about investing in growth shares right now is arguably the valuations, with some companies exceeding all expectations and valuations in terms of share price growth.
The following video from Rask Finance explains how to value ASX shares using their dividends:
The first ASX growth shares that come to mind for a lot of investors are companies like Afterpay Touch Group Ltd (ASX: APT) or WiseTech Global Ltd (ASX: WTC). With the Afterpay share price falling over the last few days, maybe there’s an opportunity to allocate a small portion of your portfolio.
Other growth shares like The a2 Milk Company Ltd (ASX: A2M) have been beaten down recently, but possibly for good reason as global trade tensions escalate.
If you’re not comfortable picking individual companies to invest in, an exchange-traded fund (ETF) or a listed investment company (LIC) might be able to provide exposure to growth shares while diversifying away some of the risks.
Summary
NAB may provide a decent dividend yield but you might be better off looking elsewhere for capital gains. If you’re stuck for ideas, check out the two growth companies in the free report below.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
