When it comes to the banks, most investors choose them for their dividends.
After all, their shares offer some of the most generous dividend yields on the Australian share market.
But which bank has the biggest dividend yield?
There are a couple of ways to measure a company's dividend yield.
You can use a trailing measurement. This method adds up the dividends that have been paid over the previous 12 months and then divides it by its current share price.
This is my favourite approach and is arguably the most common method used. But it does have its flaws.
That's because when investors are expecting a company to cut their dividend, the share price will often depreciate. This depreciation can then inflate the trailing dividend yield, misleading income investors into believing they will receive a far greater yield over the next 12 months.
Another method is a forward measurement. This can be done by estimating the dividends the company will pay over the next 12 months and then dividing it by the current share price.
I think this method is the most appropriate one for the big four banks right now. Especially given how scandals, fines, and remediation could lead to dividend cuts in 2020.
Though, as with the trailing measurement, it does have its flaws. This time the issue is the accuracy of forecasting correctly what a company will pay as a dividend.
What are the banks' dividend yields?
Based on the latter method, here is how the big four banks currently compare:
Australia and New Zealand Banking Group (ASX: ANZ) is forecast by Morgan Stanley to cut its dividend to $1.40 per share in FY 2020. This could also be partially franked given its decision to only frank 70% of its final dividend last year. This works out to be a 5.7% dividend yield.
Commonwealth Bank of Australia (ASX: CBA) is forecast by Morgans to hold its dividend firm at $4.31 per share fully franked in FY 2020. This equates to a 5.4% dividend yield.
National Australia Bank Ltd (ASX: NAB) is expected to hold firm and pay a fully franked $1.66 per share dividend in FY 2020 by analysts at Ord Minnett. This represents a forward 6.8% dividend yield. Given how large this yield is, it appears to indicate that the market isn't quite as confident as the broker.
Westpac Banking Corp (ASX: WBC) is forecast by Morgan Stanley to cut its dividend down to $1.60 per share fully franked in FY 2020. This implies a forward 6.6% dividend yield. Though potential penalties from the AUSTRAC scandal could play a big role in whether this become a reality or not.
