At the current Commonwealth Bank of Australia (ASX: CBA) share price, it yields a fully franked dividend of 5.1%.
That's a pretty hefty payment in this low interest rate environment, with 12-month term deposits fetching just 2.5% — if you are lucky.
And Commonwealth Bank's 5.1% fully franked yield becomes much more impressive when we take into consideration those tax-effective franking credits. Ultimately, its comparable dividend yield blows out to 7.3%. Pretty neat.
But as any good investor will tell you, a 7.3% dividend means nothing if the share price falls 15%!
Can you bank on Commbank's dividend yield?
Commonwealth Bank's history of dividend payments is very impressive. Since it listed on the ASX in the early 90's, its full year dividend payment has grown from less than 40 cents per share to $4.20 per share. And although it has been through some rough patches, its share price has rallied from $6 to over $86.
The key point here is that long-term investors saw an opportunity in Commbank and didn't sell out, no matter what happened. The opportunity was two-fold: Aussie households wanted more debt to fund development and wealth creation; and, the banking industry was ripe for consolidation, where one bank could take over many others.
These two growth avenues helped its dividends and the Commbank share price trend higher. However, there were times when the bank's share price plummeted and investors who sold out would have lost — big time. During the last market crash, between 2007 and 2009, for example, Commbank shares fell from over $60 to $24.
Looking forward, I think the bank's growth avenues won't be as easy to navigate. As a result, people looking to buy the bank's shares today need to be prepared that the growth of the last two decades may not continue at the same pace– and, therefore, pay an appropriate price for the shares. In terms of dividends, that also means we shouldn't expect the same blistering growth.
Should you buy, hold or sell Commbank shares?
In my opinion, Commonwealth Bank shares are a 'hold' at today's prices. Despite its impressive track record and the forecast dividend yield, I think the shares are expensive.
