Those looking for healthy dividends need look no further than our major banks. The major banks are currently offering an average 10.3 per cent fully franked dividend yield (FY12 only) which compares favourably to fixed interest (7.7 per cent) and term deposit rates (5.2 per cent). Buy ANZ, NAB and WBC and you’ll also receive the 2H11 dividend or a 15.5 per cent gross yield over the next 14 months.

The average 12-month gross yield is better in direct equities

Majors banks paying healthy yields

The Australian banks are trading at a significant discount to historical averages and offering yields not seen since the depths of the 2009 Global Financial Crisis. We believe that investors looking for yield should seriously consider the major banks as the dividends we expect from the major banks over the next 12 months are superior to returns on offer in the fixed interest or cash accounts. While not without an increased level of risk, we are confident that our earnings and therefore dividend forecasts are achievable for FY12. We forecast a 10.3 per cent gross yield for FY12. If you buy ANZ, NAB or WBC now you’ll get three dividends (2H11 plus FY12) over the next 14 months which equates to an even better 15.5 per cent gross yield over this period. ANZ bank (Buy recommendation; A$23.55 price target) is our preferred bank.

The risk is justified in our view

Investor risk profiles differ across the asset classes with equity investors being exposed to a more volatile price movements while fixed interest and cash rates have less or no capital risk respectively. Given weak market sentiment, we believe that, on the balance, the major banks have substantially more upside risk than downside risk with respect to there capital base.

There can be no guarantee that bank equity capital bases are stable, however we believe that in the absence of a global liquidity freeze (which is looking less and less likely) equity risk lies to the upside. Either way we believe those with a long-term view will be paid well to be patient and we see good potential for capital growth. For those not prepared to weather the volatility of the equity markets, our preferred fixed interest investments are ANZPL, CBAPB and WBCPA.

ANZ Bank, National Australia Bank and Westpac bank all report their FY11 results in November and will pay their 2H11 dividends in December. Traditionally the 1H dividends are paid in July. Investing buying ANZ, NAB or WBC now will receive three dividends over the next 14 months. Commonwealth Bank is a June year-end so has already declared and paid its 2H11 dividend.

Chart 1 below illustrates the various dividends on offer across the different asset classes. Dividends from the four major banks top the chart.

Chart 1: Dividends paid over the next 12 months (bank dividends are FY12 forecasts and do not include the 2H11 dividends)

Chart 2 below illustrates that while equity returns may be greater the price volatility is significantly larger and therefore more risk-averse investors may prefer the fixed interest asset class.

Chart 2: Comparing the capital base of ANZ fixed interest investments with the direct equity

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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.