At the current Commonwealth Bank of Australia (ASX: CBA) share price, it is forecast to offer a 5% fully franked dividend yield.
CBA Dividend Yield
The chart above compares Commbank's dividend yield to that of Woolworths Limited (ASX: WOW), Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES).
Show me the money!
Not everyone knows it, but a company is not required to pay a dividend. Indeed, no matter how big its profits, a company's board of directors can choose not to pay a dividend. In fact, there are three rules (under law) that management teams must satisfy before they can declare a dividend.
Basically, what I'm saying is: dividends are not guaranteed. Unlike a term deposit or savings account, which can be guaranteed up to $250,000 per person per bank, your dividend could disappear tomorrow.
Are CBA shares a buy for the dividend?
Obviously, a great way to know whether a dividend will be paid is to understand how a company makes its money and think to yourself if it is sustainable. For Commbank that's pretty easy. It lends money, it charges account fees, it manages people super and provides insurance.
Around 67% of Commbank's income comes from lending, with the remainder mostly coming from other banking activities and funds management. Therefore, it might be reasonable to expect that the bank's dividend will be sustainable if it upholds its lending standards and the economy keeps ticking along.
But even if the market crashes, Commbank might only withhold its dividend for a year or two until things are back to normal. That's something most investors forget about banks — virtually, they are legally required to be profitable or else they will fail.
If Commbank was to reach near bankruptcy, the government of the day would be forced to come to its aid. Of course, it would not help its dividends (most likely, it would have to pay back the government before issuing a dividend). However, its provides some reassurance for investors holding shares for the long-term.
Buy, Hold or Sell
Investing successfully requires us to do more than simply pick the companies with big dividends. After all, although Commbank shares pay a 5% dividend there is nothing to stop its share price falling 20% this year.
At today's prices, I'm not a buyer of the bank's shares because I think there are better opportunities available on the market. So while I think the Commbank dividend is very appealing — especially compared to term deposit interest rates — and likely sustainable, there are better dividends on offer.
