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Are Westpac shares a buy for dividend income?

You might have missed it, but the Westpac Banking Corp (ASX: WBC) share price hit a new 52-week high on Friday of $29.97. Westpac shares have since pulled back and are swapping hands for $29.52 at the time of writing, but this is still the highest level this ASX bank has been at since August last year.

Even at these new highs, Westpac’s annual dividend of $1.88 per share offers investors a starting yield of 6.4% (or 9.14% grossed-up). So is Westpac still a buy for dividend income on these juicy numbers? Let’s have a look.

Why have Westpac shares been surging this year?

On today’s prices, Westpac shares are now 20% higher than when they started the year (and that doesn’t include dividends). This is quite a dramatic move for such a classic blue chip share like Westpac, and (in my opinion) it reflects the changing sentiment towards the big ASX banks that the conclusion of the Royal Commission has brought. Also assisting was the surprise Coalition election victory in May – Labor’s policies of curbing negative gearing and abolishing refundable franking credits would have been especially damaging to the banks and the continuation of the status quo has bolstered Westpac’s shares further.

Recently, strong data coming out of the property market indicates a turnaround in the housing slump that has been dragging house prices lower over the past year or two. All of the ASX banks profit immensely from mortgages and property loans, and Westpac is particularly exposed to this sector. Increased lending activity and higher prices translates directly into higher profits, and I suspect this trend is bolstering sentiment for Westpac.

Is Westpac a buy for its dividend?

Even though Westpac has maintained the same dividend payout of $1.88 per share since 2015, I personally think Westpac’s dividend may not be as sustainable as its investors hope going forward. Westpac’s banking stablemate National Australia Bank Ltd (ASX: NAB) has already cut its dividend payout this year and I think Westpac is the most likely candidate to follow. In its 2018 full year earnings, Westpac’s dividend payout ratio was 80% – dangerously high by any standards. Throw in compensation from the Royal Commission and this ratio is likely to be higher still for the 2019 full year that Westpac will report in November.

Foolish takeaway

I still think Westpac will be a great income share to own for a while yet, but I also think that a cut to its next dividend is looking more likely than not at this point. Therefore, I wouldn’t be looking to buy Westpac shares at these levels, and think that anyone wishing to open a position might be better off waiting for a ‘bargain’ price.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. 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.