Sunday, June 1, 2014

Which Australian Bank Pays The Best Dividends?

Australian Banks have long been popular investments among Aussie investors. One of the reasons has been the fact they have been among the best paying dividend shares.

Below is a table of the 6 largest banks listed on the ASX. They are ordered according to which bank pays the best dividends. All of the distributions paid by  shares listed in the table below are fully franked.

Company Name Current
NAB National Australia Bank $33.49 5.9% 6.8% 80%
BEN Bendigo and Adelaide Bank $11.73 5.3%9.5% 76%
ANZ ANZ Banking Group $33.49 5.2% 12.6% 70%
BOQ Bank of Queensland $12.00 5.2% 3.6% 90%
WBC Westpac $34.42 5.2% 13.7% 78%
CBA Commanwealth Bank $81.59 4.7% 12.4% 75%

As you can see the National Australia Bank is a clear leader in terms of yield, but there are a number of other factors to consider.

Dividend Growth Investing

While the current dividend yield is important for those investors looking for income, the level of future payments should be just as important. If you plan on holding your shares for the long term, growth in future dividends could dwarf your current yield.

In the table above, the fifth column is the average annual growth rate of dividends for bank shares over the past 5 years. Although some investors liken looking at historical figures as akin to driving while looking in the rear view mirror, sometimes history can be a good predictor of the future.

The table shows that although NAB shares currently have the highest rate of return, they also have the second lowest growth rate (behind Bank of Queensland). Westpac, ANZ and Commonwealth Bank each have historical growth rates over 10%.

Dividend Yield Is A Function Of Share Price

But the amount of the payment is only one half of the dividend yield equation - share price is the other. As the price goes down, the yield goes up (and vice-versa). So the cheaper you can buy your shares, the higher the yield.

Of course, sometimes a high yield (and its corresponding low share price) is a vote of no confidence from investors. It may be that investors are concerned about the future prospects of the company. Make sure you do your research and don't invest solely on the basis of a good dividend yield.

Will The Dividend Be Maintained?

Speaking of which, the final column of the table is the payout ratio. This tells us what percentage of profits are being paid out to shareholders. The lower this percentage is, the greater the chance that a company will maintain or even grow its distributions in the future. If that percentage is too high it may mean the dividend will need to be cut if there are any future problems at the company. A lower payout ratio means there is more of a buffer against leaner times.

Do Your Own Homework

What is presented above only scratches the surface. Make sure you do your own research before making any investment. Just remember that a poor investment could lead to a large capital loss in the future which will more than offset the good dividend yield you see now.


Cyan Investment said...

I think Westpac is the best option in terms of Dividend Yield , Annual Growth Rate and Payout Ratio.Thank you for the enviable information .
I will surely do the homework before investing.

Low Paul said...

so long as there is a past history of 10 year dividend raises, this alone increases the likelihood of the similar repeat for the next 5-10 years.