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Is the ASX banking dividend yield for Westpac of nearly 10% too good to be true?

Is the dividend yield of Westpac Banking Corp (ASX: WBC) too good to be true? Grossed-up, it’s almost 10%.

When you compare that to other ASX bank dividend yields it certainly looks more attractive. The Commonwealth Bank of Australia (ASX: CBA) grossed-up dividend yield is 7.6%, Australia and New Zealand Banking Group’s (ASX: ANZ) is 8.4% and National Australia Bank Ltd’s (ASX: NAB) is likely 8.8%.

To have around 1% of an additional yield on your peers can make a big difference for shareholders. On a $100,000 holding it adds an additional $1,000 of income.

However, I do wonder whether Westpac’s dividend will follow the same pattern as NAB’s.

Both Westpac and NAB maintained their dividend for a few years, but we have seen NAB had to reduce the dividend to a more sustainable level.

In Westpac’s recent half year result it generated 95.8 cents of earnings per share (EPS), meaning the dividend payout of $0.94 represented a payout ratio of 98% – only just ‘sustainable’. When you exclude the remediation and restructuring costs Westpac generated EPS of $1.176, an underlying dividend payout ratio of 80%.

The big question is whether Westpac’s reported EPS can grow enough to sustain the current dividend as well as increasing the level of capital it holds, which is being asked of it in both Australia and New Zealand. Westpac had a CET1 ratio of 10.64% at March 2019, so it is quite well capitalised to meet these additional requirements.

Everyone seems to be predicting that Australian house prices are done falling, but I wouldn’t want to make that call until at least the end of Spring. This time of year always has low listing volumes, and historically has been the better time of year for house prices.

Foolish takeaway

Westpac’s dividend may well be sustainable at this level, but I wouldn’t want to make that bet. Particularly with mortgage arrears trending upwards.

For dividends I would much rather invest in these leading ASX income stocks.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

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