Commonwealth Bank of Australia (ASX: CBA) has long been targeted by investors looking for a way to bolster their income by receiving fat, fully franked dividends.
Australia's largest bank played a key role in driving the market higher from the depths of the Global Financial Crisis to nearly breaching the 6000 point mark in March and April this year. Indeed, the stock has often yielded in excess of 5% (fully franked), while it traded with a yield of roughly 6.4% in 2009 and 6.7% in 2012.
As can be seen in the chart below however, the stock now trades on a forecast dividend yield of just 4.9% (based on a current share price of $85.92 and a forecast dividend of $4.21 per share for the 2015 financial year). That's superior to the average of 4.6% for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), according to figures provided by Morningstar, although not by much.
Source: Company reports, Yahoo! Finance
Before I go on, it is vital that investors account for more than just a dividend yield when deciding whether or not to purchase a stock. Indeed, there is so much more to consider including the company's ability to continue growing earnings and its ability to grow or even maintain its dividend.
When it comes to Commonwealth Bank of Australia, investors need to focus on what is happening through the windscreen and not what's being reflected in the rear-view mirror. Commonwealth Bank of Australia has historically been one of Australia's greatest dividend stocks but forward-looking investors will note the headwinds that could threaten its future growth potential.
I would argue that now is the wrong time of the economic cycle to buy Commonwealth Bank, or any of the Big Four banks for that matter. Impairment charges will soon reach a turning point where they start impacting earnings in a negative way while the financial regulators are also concerned about loans being written and the impact they could have on the already-inflated property market.
At the same time, stricter capital requirements could force the banks to raise more capital (as National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have already done) which could restrict dividend growth in the near future.
Although a 4.9% fully franked dividend yield might look appealing in today's low interest rate environment, investors would be wise to bolster their dividend income elsewhere.
