Q: I have maturing Term Deposits that I am looking to reinvest. Would I be better reinvesting in a CBA term Deposit at less than 1.1% for 1 year or buying CBA shares with a dividend yield of 5.5%?
A: The age old dilemma; “Do I buy a Term Deposit offered by a bank or do I buy the bank?”
Dividend yield is a measure of past earnings performance. It is calculated by dividing the dividends paid by the current share price. It is not a forecast of future earnings potential.
The dividends of CBA have been remarkably stable over the past five years, yearly dividends per share have risen from $4.16 in 2014 to $4.31 in 2019. Whilst the current dividend yield of CBA shares is 5.5%, there is no guarantee that this will continue.
Investors who buy shares in what appear to be high yielding stocks can be caught when the company subsequently cuts dividends. This is referred to as being caught in the “Dividend trap”.
Share prices will rise and fall in a cycle. Over time the share price of a company will range from expensive to cheap depending on market sentiment, the performance and future prospects of a company. Despite the relative stability of dividends, over the past 5 years the CBA share price has varied between $65.23 and $96.16 a share.
How you invest your portfolio should be determined by your income needs, your risk profile (how much volatility you can afford to bare) and your investment time frame. Investing in one stock or one sector is a high risk strategy and not recommended.