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Is the CBA share price a yield trap?

Is the Commonwealth Bank of Australia (ASX: CBA) share price a dividend yield trap?

ASX bank shares aren’t really the flavour of the month right now. All of the big four banks bar Commonwealth Bank have delivered income cuts to their shareholders this year. And Westpac Banking Corp (ASX: WBC) is still dealing with the fallout from the appalling allegations that AUSTRAC has recently made, which saw its CEO resign.

So CommBank seems to be the standout performer, having delivered a flat dividend this year that remained fully franked. But are investors buying into CBA shares today getting themselves in a yield trap?

What is a yield trap?

This occurs when an investor purchases shares in the expectation of dividend income yield of a certain level, only to have those expectations dashed when the company in question lowers or abolishes their shareholder payouts.

Westpac and National Australia Bank Ltd (ASX: NAB) could have been described as a yield trap in hindsight, as both banks were forced to slash their dividends by around 15% during the year.

Hence, anyone who bought NAB shares in January for the “7% yield” was subsequently caught in such a trap.

If you want a starker example, just think of AMP Ltd (ASX: AMP)’s poor shareholders. This year, AMP management was forced to cease paying a dividend altogether after the company’s restructuring program hit some snags.

But take a look at this:

Source: Google Finance

That’s right, anyone who bought AMP ‘on the dip’ earlier this year expecting a bumper 7.6% dividend yield would be supremely disappointed today at their current yield of 0%. It’s your classic yield trap.

So is CBA a yield trap?

That depends if CommBank can hold the fort and afford to pay its $4.32 per share dividend next year. For some perspective, CommBank earned its investors $4.69 per share last year, which means it is shovelling 92% of its earnings out the door – a level I wouldn’t describe as sustainable myself.

Sure, this includes many ‘one-off’ compensations payments made in light of the Royal Commission revelations. But (as we’ve seen with Westpac), who knows if there are any skeletons in CommBank’s closet.

Foolish takeaway

Whilst we don’t know how CBA’s 2020 earnings will go just yet, I have to say I would rather put money on a dividend cut for Commonwealth Bank than not. All of the banks are facing significant headwinds in the current low-rate environment, and CommBank would have to pull a fairly large rabbit out of its hat to grow earnings significantly next year, in my view.

Still, you never know – maybe the rebound in housing prices might be such a rabbit.

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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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