Are the big four banks still the best source of dividends?

Three of the country’s major banks are set to report their half-year earnings results this week, but while their cash earnings are always a big talking point, it is their dividends that will likely be scrutinised the most this time around.

Westpac Banking Corp (ASX: WBC) kicked off the string of earnings announcement today, and the fact that its shares fell 4.5% in early trade says a lot. The group’s cash earnings rose 3% to $3.9 billion, although its cash earnings per share declined by 2% to 118.2 cents due to the dilution caused by the issue of new shares.

It also announced a fully franked dividend of 94 cents per share. That dividend was 1% higher than the dividend declared a year ago, but flat against the dividend announced by the group six months ago. Commonwealth Bank of Australia (ASX: CBA) also elected to leave its dividend unchanged (compared to the prior corresponding period), when it reported its half-year earnings in February.

Given that investors have long relied on the banks to grow their dividends, it is perhaps no surprise that investors are now expressing their disappointment over the lack of growth they are seeing.

While the dividends declared by the major banks are tipped to remain mostly flat this week, there are more concerns regarding their ability to maintain or grow them in the future, with the biggest concerns arguably surrounding both Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB). The pair will announce their results tomorrow and Thursday, respectively.

Indeed, one of the major factors contributing to the lack of dividend growth is the additional requirements for the banks to hold more capital against the loans they write. These requirements were part of the reason why Westpac’s return on equity (ROE) – an important measure of profitability – fell 1.66% during the half to 14.2%, while it was also the major reason behind the bank’s need to raise additional capital in 2015.

Meanwhile, loan impairment charges are also expected to weigh on earnings results in the coming years, while lower interest rates could also continue to drive competition within the sector.

While Westpac’s shares fell 4.5% today, the shares of each of its rivals fell nearly 3% as well, reflecting the market’s diminishing confidence in the banks’ abilities to continue generating above-average returns over the coming years. The lack of dividend growth is a big part of this, and investors may be better off looking outside the sector for other dividend-paying opportunities.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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