Did Westpac's dividend cut just get cancelled?

Did Westpac Banking Corp (ASX: WBC)'s dividend cut just get cancelled?

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Yesterday, Westpac Banking Corp (ASX: WBC) set the markets on fire when it announced that its cherished dividend would have to be cut for the first time since 2008. That's right, a decade of dividend increases has just come to an end.

Of course, Westpac's dividend has been flat at $1.88 per share since 2015 (which means that inflation has been decreasing the real value of Westpac's payout for a while now), but a cut is a lot more dramatic than a flat payout.

Westpac now joins its stablemates National Australia Bank Ltd (ASX: NAB) and more recently Australia and New Zealand Banking Group (ASX: ANZ) in delivering dividend/franking credit cuts this year. Out of the 'big four', only Commonwealth Bank of Australia (ASX: CBA) has kept the same level of shareholder cash coming in the door in 2019 so far.

But here's the funny thing about dividend cuts – the falling share price that often accompanies said cut can nullify the effects of the cut in the first place.

Let me explain.

Yesterday, Westpac shares were placed in a trading halt – frozen at $27.91 until the market reopened this morning. At this old price, Westpac's former annual dividend of $1.88 per share translated into a yield of 6.73%, whereas its new payout of $1.60 per share only comes in at 5.7%.

But today, Westpac shares have dropped 4.57% lower at $26.60. On this price, Westpac's new dividend offers a starting yield of 6.02% – cancelling out some of the potency of the payout cut. This 6% yield is still higher than what CBA shares will give you today (as well as ANZ if you include the new lack of franking credits).

Of course, this is of cold comfort to those who already own Westpac shares – they still get a double whammy of lower share prices and lower yields. But for anyone who might have been looking to get in on Westpac shares, it's not such a bad outcome.

Foolish takeaway

On today's prices, Westpac shares are offering a 6.02% yield (still fully franked) – not too far from last week's 6.57% offering. Even after the cuts we have seen in 2019 from almost all of the banks, they remain some of the best yielding dividend shares available. Whilst I do think these companies have some short- to medium-term risks in their earnings outlook, I still think that they can offer a valuable contribution to your income portfolio going forward

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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