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Is the NAB share price a buy for its high-yield dividend?

Are National Australia Bank Ltd (ASX: NAB) shares a buy for ASX dividend income today?

The NAB share price has rewarded shareholders handsomely in 2019 so far. NAB shares have gone from $23.63 at the dawn of the year to the $29.09 we see at the time of writing – representing more than a 23% YTD gain so far (and that’s not even including dividends).

Speaking of dividends, NAB shares are offering a starting yield of 6.3% on current prices, which translates to a grossed-up yield of 9% if you include the value of the full franking credits NAB offers.

Such a yield is amongst the best payouts you can get on the ASX – even in the ASX banking sector. But is this reason enough to buy NAB shares today?

Why have NAB shares shot the lights?

NAB has benefitted enormously from a changing sentiment over the ASX banks this year. If you cast your mind back 12 months, the ASX banks were in the firing line over the scandals exposed at last year’s Royal Commission. No one knew if harsher profit-killing regulations were going to be imposed on the banks and investors weren’t too keen to roll the dice.

All that seems like a distant memory today, with sentiment now strong. The banks did have to fork out large compensation payments, but these were ‘one-off’ costs that left bank profits untouched on a structural level.

Are NAB shares a buy today?

Whilst I think NAB shares have returned to a ‘fair value’ stock price, I am not too confident about the medium-term future for the banking sector. Record low interest rates will start to squeeze banking bottom lines if they stay in place for an extended period (which all signs are pointing to). Although NAB has a reasonable healthy payout ratio covering its dividend at 77%, it’s still not a huge buffer against an economic shock or permanent change in the interest rate environment.

Foolish takeaway

I think NAB shares are still a good buy for dividend income today, but I wouldn’t be going overweight on banks anytime soon. There are a lot of risks to the medium-term outlook, and I’m not convinced the NAB dividend will survive intact if we see a deterioration in economic conditions. NAB is a solid ‘hold’ for me today.

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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.

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