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Is the Westpac share price a buy for its 9.6% dividend yield?

Is the Westpac Banking Corp (ASX: WBC) share price a buy for the grossed-up dividend yield of 9.6% on offer?

The big bank didn’t cut its dividend in its recent report, unlike National Australia Bank Ltd (ASX: NAB) which did. Australia and New Zealand Banking Group (ASX: ANZ) cut its dividend a few years ago.

Westpac and Commonwealth Bank of Australia (ASX: CBA) are the only two of the four big banks to have maintained or grown their dividends each year since the GFC. That’s a pleasing level of income stability for shareholders.

The income is particularly important in this era of low interest rates. The amount of money you can make from a Westpac term deposit is very low, it’s barely keeping up with inflation. I’d much rather just own Westpac shares.

But Westpac shares are certainly not risk free. Share prices can go down, earnings can fall and dividends can be cut. That’s the risk of the share market. 

Westpac is well positioned with its balance sheet, it had a CET1 capital ratio of 10.5% at 30 June 2019. However, what I’m keeping my eye on is the potential for growing bad debts with Westpac.

During the June 2019 quarter Westpac saw a $0.1 billion increase of impaired assets to $1.9 billion. Westpac also said it had Australian unsecured 90+ day delinquencies of 1.91% (up four basis points (0.04%) over the quarter) and Australian mortgage 90+ day delinquencies of 0.9% (up eight basis points (0.08%) over the quarter), these could be worrying signs.  

Westpac also said that the number of properties in possession rose by 68 over the quarter to 550, with the increase mostly in Western Australia and Queensland. It’s a small number, but a material percentage increase over a three-month period.

Foolish takeaway

Westpac is trading at 12x FY20’s estimated earnings with a grossed-up dividend yield of close to 10%. It could be an option to consider for income, but I’m wary of banks because of their gigantic balance sheets. The financials of a bank don’t tell you how risky (or not) the borrowers are, which is why I don’t want to invest in ASX banks myself.

If I were looking for income I would much rather own shares of these top ASX shares for my portfolio.

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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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