What the analysts are saying: buy the yield

Bank stocks lost ground in 2011 but at least they traded above the market index, the S&P/ASX 200. Analysts and equity strategists are extremely cautious about the outlook for 2012 but they do like the high dividend yields that banks offer.

Commonwealth Bank started the year around the $51 mark and is now trading around $49.

ANZ started the year around $23 and is now trading around $21.

Westpac started the year trading around $22 and is now in a range between $21 and $22.

NAB has had the best result. It started the year in a range between $23 and $24 and it has finished in the same position.

Big bank stock prices have been less volatile than the S&P/ASX 200 and have outperformed the index.

In a note to clients published earlier this month, JP Morgan equity strategist Paul Brunker said the Australian equity market in 2011 could be characterised as one of high volatility and high stock correlation – the market is a “risk see-saw” and most stocks are following that trend.

Brunker said the banks were among a group of stocks that were highly correlated to the market but with less volatility. He said: “This group tends to follow macro moves reasonably closely but not exaggerate them.”

Morningstar has issued a report on the banks highlighting their high and sustainable dividend yields. Its view is that in a market where expectations for growth are low, strong yields are attractive.

Banks paid yields of 6.5 to 7.5 per cent on their 2011 earnings. Macquarie Equities estimates that, on current prices, yields on 2012 earnings will be higher.

Macquarie has issued dividend yield forecasts (based on current prices and 2012 earnings estimates) of 7.1 per cent for ANZ, 7.1 per cent for Commonwealth Bank, 8.1 per cent for NAB, 8.3 per cent for Westpac, 6.7 per cent for Bendigo and Adelaide Bank and 7.4 per cent for Bank of Queensland.