INSIDE INVESTOR: Banking on yield

With bank profits likely to remain high and interest rates low, the strong yields provided by banks will continue to make them a popular choice for investors.

When they write the economic history books, 2012 will be remembered as the Year of the Bank, at least in Australia.

While they were caught up in the fall out, our banks largely missed out on the calamity that afflicted global finance more than four years ago because they barely dabbled in the toxic investments that brought Wall Street and European banks undone.

As a group, they continued to churn out mega-profits in the post crisis environment. And last year, they inadvertently fired up a resurgence on the local stockmarket.

As the Reserve Bank cut official interest rates, our banks cut term deposit rates. Those deposit rates had really ticked up in the wake of the financial crisis as the banks weaned themselves off foreign loans and decided they needed more cash from local deposits.

But last year, as they felt more comfortable about their funding mix, they no longer had to offer big premiums.

That fired up a hunt for yield. And ironically, the best yield on the stockmarket was offered by the banks. A lot of people took their money out of the bank and bought bank shares, sending bank stock prices soaring and sparking a solid climb on the market that continued right through January.

But can that continue into 2013? Late last year, many stockbrokers and banking analysts began questioning whether the banks could maintain their hefty dividend payments. A lot of them figured Australia was about to go through a rough patch as the mining boom ended and the non-mining sector continued to struggle under the weight of the dollar.

So far, their fears have been unfounded. Our banks remain among the healthiest in the world and investors keep piling into bank shares for the simple reason that those dividend payments are among the highest on the stockmarket, even after the massive share price rises of 2012.

And the returns – up to 8 per cent if you take the tax treatment into account – certainly represent a much better yield than you can get anywhere else, much higher than the government bond rate.

Dividends are never set in stone. They are simply a proportion of the profit that is handed back to shareholders. But there are no immediate threats to bank earnings and hence to dividends. The economy is growing, unemployment is about as low as it can be and with interest rates tipped to fall further this year, those dividend yields will become even more attractive.