This article has been updated as of 23 December 2024.

Dividends are the easiest form of passive income.

There are no strings attached, and you’ll receive exactly what the company distributes.

The only downside is that they heavily rely on a company’s profits. If said company has a disastrous year, they’ll pay their shareholders less, or worse, not at all.

But this is not the case for local banks.

Generally, most of them pay dividends twice a year - once in March and once more in September.

Take Maybank for instance. In the past decade, its annual dividend yield ranged from 50 to 60 cents a share, regardless of how the broader market performed.

This stability and consistency is what makes bank stocks so attractive to investors.

Banks are “relatively” stable.

They are cyclical stocks, meaning that they tend to fluctuate in conjunction with economic conditions.

In simple terms, banks are likely to perform when the economy is healthy, and conversely fall during a recession/downturn.

Unlike a growth company or a defensive stock, banks oscillate on a slight uptrend over the years, swinging from their highs and lows.

With the knowledge of how banks “cycle”, you’ll know exactly when a bank is “undervalued” or “overvalued”.

This cycle is also what makes banks a “relatively” stable investment.

The Most Valuable Companies in Malaysia.

Maybank, CIMB and Public Bank - what do these banks have in common?

Apart from paying GENEROUS dividends, they are the 3 most valuable companies in Malaysia.

In fact, 4 of the top 10 companies in our country belong to banks.

Big institutions invest in them too.

In 2021, the Employees Provident Fund (EPF) had RM146 billion invested in the Malaysian market.

And guess what? A large portion of it goes to bank stocks.

EPF is the 2nd largest shareholder of Maybank, falling behind ASB (Amanah Saham Bumiputera).

Ok, enough with the pros. Tell me the cons.

i) Cyclical nature.

Though “relatively” stable, the share prices of banks can sometimes fluctuate within a wide range.

During economic downturns (such as the Covid pandemic), banks are not immune to steep declines, even though the price swings are generally lesser compared to other stocks.

Before investing, ensure that you can take a certain amount of risk and some volatility.

ii) Dividend volatility.

When a company declares dividends, the stock price will drop by almost the exact amount during the ex-dividend date.

So, if you want to receive dividends, you have to buy the stock BEFORE this date.

iii) Smaller banks are prone to greater price and dividend swings.

Smaller, mid-sized firms are more volatile than larger companies because it takes less money to move their share prices.

Also, smaller banks are often inconsistent in their dividend payouts. In some years, you may not even receive any dividends.

Take MBSB for example.

Even though it has paid a dividend of 8.5 cents a share (or 14.53%) in 2022, historic data shows that its payout ranges wildly from 3.42% to 20.51%.

Of course, this may still seem like an attractive deal. After all, 3.42% being the lowest payout is still not bad right?

Well, let’s have a look at MBSB’s historic share price.

The bank has declined by 71% since its all-time high of RM2.73 in 2013. Now, things don’t look that attractive anymore.

Check these two things before choosing a bank:

i) Historic dividends. You want to make sure that the payouts are consistent, with minimal fluctuations.

ii) Historic share price. If the bank you chose is on a downtrend despite other banks performing well, then it may indicate that the bank is struggling financially.

Personally, I just hold Public Bank and Maybank because they are the two largest holdings of EPF.

How can I start investing?

You can invest in bank stocks via Rakuten Trade.

The platform offers MY, US, and HK stocks, as well as 205 different types of ETFs from the US.

Sign up with my referral code today and you’ll receive 1,000 RT points to lower your brokerage fees!

DISCLAIMER: This is not a sponsored article. Investing in bank stocks has its respective risks and is very different from opening a deposit account with a financial institution. You should always speak to a financial planner before making any investing decisions. ⚠️

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