Australia and New Zealand Banking Group (ASX: ANZ) has a grossed-up dividend yield of 8%, is the share price a buy?
Despite the ANZ share price being down by over 1% today, it has still gone up by over 5% in just the past month.
People may be wondering where to invest their capital with the Reserve Bank of Australia (RBA) cutting interest rates by another 0.25% to 0.75% this week. If ANZ is able to keep its net interest margin (NIM) relatively flat then it could be an attractive option for people looking for income.
It's not good earning 1% or less from the spare cash in a bank account if you could be making better returns from shares.
ANZ has been paying a dividend of $0.80 per share every six months for a few years now. If there aren't any more huge royal commission costs to be revealed (like we saw from National Australia Bank Ltd (ASX: NAB) today) then perhaps ANZ's 8% dividend is safe.
Australia's housing market seems to be getting back to a strong recovery. However, the trade war between the US & China and falling Australian construction activity could still derail a return to sustained housing boom times. A stronger housing market is good for ASX banks like ANZ.
One of the biggest detractors from medium-term profits for banks like ANZ could be because they're being forced to hold more capital in Australia and New Zealand. Banks particularly didn't like the higher capital requirements set out by the Reserve Bank of New Zealand (RBNZ). This undoubtedly makes banks safer in bad economic times, but it does reduce their profitability in the brighter times. But I'd rather our major banks be utterly sound during all parts of the cycle.
Foolish takeaway
ANZ is trading at 12x FY20's estimated earnings. This seems like a pretty good price for a major ASX bank, so I can understand why retirees are interested in the income offered. But I'm not sure how much ANZ can grow its revenue or profit over the long-term, which is why I prefer businesses that can offer both good dividends and growth.
