Until very recently, shares in the major banks and supermarkets were on fire.
However, for various reasons the market's perception of safe growing assets appears to have changed, pushing down the share prices of these ASX blue chips.
Consequently, their trailing fully franked dividends yields have ballooned higher:
- Commonwealth Bank of Australia (ASX: CBA) – 5.6%
- Westpac Banking Corp (ASX: WBC) – 6.1%
- National Australia Bank Ltd. (ASX: NAB) – 7.1%
- Australia and New Zealand Banking Group (ASX: ANZ) – 7%
- Wesfarmers Ltd (ASX: WES) – 4.8%
- Woolworths Limited (ASX: WOW) – 5.5%
But are the yields sustainable?
Supermarkets
You only need to look as far as Woolworths' share price to see what can happen if your management team becomes complacent. For Wesfarmers, which has been outperforming Woolies for many years now, the team and performance has gone from strength to strength. Coles, Bunnings Warehouse, Kmart, and Officeworks are market leaders and growing their business lines.
However, the fear among most supermarket shareholders is competition. Coles has been growing fast at the expense of Woolworths, but is unlikely to keep growing that easily. Combined with competition from Aldi and to a lesser extent Costco (not to mention Amazon), the profit growth from Wesfarmers is not be set in stone.
While Wesfarmers is a far greater dividend proposition than Woolworths for those seeking income, it's not without risk.
Banks
Three of the major banks reported interim results this week. In a recent blog post, KPMG's National Sector Leader, Ian Pollari, noted the declines in combined profits were a result of increasing impairments, technology related charges and one-off impairment and restructuring costs.
"The aggregate charge for bad and doubtful debts increased AUD834 million to AUD2.5 billion in the first half, up 49 percent on the first half of 2015," he wrote.
Given the cyclicality of the banking sector, investors must be mindful of the potential to encounter extended periods of lacklustre profits and dividends. While the recent history may seem to rebuff any notion of it, there will likely come times when the banks are forced to cut dividends and margin squeezes. By cutting its interim dividend and forecasting a lower full-year payout, ANZ is the perfect example.
That's not to say all banks will disappear overnight — far from it — though investors should ensure they pay good prices for any new share positions and maintain a diversified portfolio.
Which share is right for your portfolio?
Bank dividend yields appear very generous, especially in the low-interest rate environment. Commonwealth Bank has proven to be the best bank among the majors for many years, while Wesfarmers is a clear favourite in supermarkets. If I were to pick one share for income today, it'd be Commonwealth Bank.
However, it's important to note that I'm not a buyer of Commbank shares at today's prices because I'd like to take a closer look at its annual report later in the year to better assess the likelihood of rising impairments.
