It’s well known that you can’t buy yesterday's returns, yet this is what a lot of investors do when making a decision about where to invest.
What many fail to consider is that the investments that achieve the best return in the previous year usually don’t perform the following year. And when you take into account the effect of inflation on the overall return in recent years, it means investors have been losing out.
The situation has been made worse given that CPI has also been high. This has made it hard for investors to make the right decision because investments need to achieve higher returns than CPI and fees – otherwise, their capital is eroding.
According to the RBA, CPI has fallen since January of this year for six of the last seven months to the end of July to be sitting at 4.9%, which is still above the target range of 2% to 3%. So where is the best place to invest? In my opinion, you can’t go past the big four banks and I don’t mean putting your cash in a bank account or term deposit. If you trust the banks to hold your cash, then you should trust them enough to buy their shares.
All of the banks are paying a very good dividend yield that is similar to or better than CPI but the big advantage of owning the bank’s shares is the opportunity to achieve capital gains. Right now, ANZ Banking Group (ASX:ANZBY) Ltd is paying the highest yield at around 7%, Westpac banking Corporation is around 6%, National Australia Bank Limited is around 5% and finally, Commonwealth Bank of Australia (ASX:CBA) is around 4%.
The banks also issue a fully franked or tax-paid dividend, which means the gross yield you receive is much higher.
Despite the big four banks' share prices not performing that well over the past year or so, I believe they are set to rise in a sustained uptrend, which makes now an opportune time to invest before they start to rise. While we can’t buy yesterday's returns, we can certainly set ourselves up to receive tomorrow's returns, which is a far safer way to invest.
Dale Gillham is the Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online at www.wealthwithin.com.au