Should you invest in ASX banking shares for an annual dividend income of $100,000?

It’s getting very hard to find good value shares these days, for both growth or dividend shares. Are ASX banking shares the answer?

The ASX is trading at close to its all-time highs, whether you are looking at the ASX 200 or All Ordinaries.

But the same isn’t true of the ASX banks, and they’re trading cheaper than the market. The Australia and New Zealand Banking Group (ASX: ANZ) share price is valued at 11.5x FY20’s estimated earnings and Westpac Banking Corp (ASX: WBC) is trading at 12x FY20’s estimated earnings. They are a fair bit below their all-time highs. 

Banks trade at lower earnings multiples due to their nature and the risks involved, but it does lead to a higher dividend yield. ANZ has a grossed-up dividend yield of 8.4%, Westpac has a grossed-up dividend yield of 9.7%, Commonwealth Bank of Australia (ASX: CBA) has a grossed-up dividend yield of 7.5% and National Australia Bank Ltd (ASX: NAB) has a grossed-up dividend yield of 8.6%.

There are also regional operators that pay large dividends like the Bendigo and Adelaide Bank Ltd (ASX: BEN) grossed-up dividend yield of 8.7% and the Bank of Queensland Limited (ASX: BOQ) grossed-up dividend yield of 11.2%.

Depending on the banking shares and allocation you chose, it would be possible to create a 9% grossed-up yield generating annual dividends of $100,000 with a portfolio of around $1.1 million.

But I’m sure you can see the problem if you just invest in ASX bank shares. You’re putting all your eggs in one basket – banking and indirectly property. Of all the banks I’d much rather invest in Macquarie Group Ltd (ASX: MQG) shares for the global and diversified earnings, or perhaps CYBG Plc (ASX: CYB) for a different earnings source.

Foolish takeaway

Whilst it’s entirely possible to generate large income from the banks, I’d think it’s a wise idea.

I would much rather invest in uncorrelated businesses such as Duxton Water Ltd (ASX: D2O) for my dividends.