Is it a risky idea to use a combination of cash and dividends from Commonwealth Bank of Australia (ASX: CBA) shares to solve the low interest rate problem?
Commonwealth Bank of Australia or CBA is Australia’s largest bank, with commanding market share of the mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, 14.1 million are in Australia. It is entrenched in the Australian payments ecosystem and financial marketplace.
Is Cash And CBA Shares The Answer?
The Reserve Bank of Australia (RBA) recently took the unprecedented step of decreasing the Australian interest rate by 0.25% to 1%, another record low.
Even if you had a $1 million term deposit, it would only make around $20,000 a year – which just isn’t enough to live off. A full time worker, even at minimum wage, would earn around double that.
But it could be an idea to boost the income yield of cash with dividends or distributions from shares.
For example, the CBA dividend yield (including the franking credits) is 7.5%. If your wealth was 50% cash and 50% CBA shares the combined yield would be 4.75%. That’s much more attractive than 2%.
What’s The Problem?
There are many issues with that strategy. For starters, having all of your shares investments in one business is terrible diversification.
But more importantly, there is no guarantee that the dividend yield will be maintained let alone grow. Dividends can be cut. Share prices are, at best, volatile and can go down quite significantly.
CBA may face a number of disruptions to its profit in the next few years. Digital banks may steal market share. Digital payment services like Apple Pay may steal transaction fees. The Australian housing market could fall, causing losses to the banks.
So What To Do?
I certainly feel like retirees should look for higher yields elsewhere, but I believe it needs to be part of a diversified dividend portfolio with shares like BetaShares Australia 200 ETF (ASX: A200), Future Generation Investment Company Ltd (ASX: FGX), WAM Microcap Limited (ASX: WMI) and Vitalharvest Freehold Trust (ASX: VTH) which also offer high yields but could be considered more diversified and less cyclical.
Other options to consider are the reliable and proven dividend shares in the free report below.
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Disclosure: At the time of writing, Jaz owns shares of Future Generation Investment Company and WAM Microcap, but this could change at any time.
