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Warning! ASX bank shares could be dividend traps in 2020

Could the ASX banks like Commonwealth Bank of Australia (ASX: CBA) be dividend traps in 2020?

Amongst the worst victims of this 2020 bear market has been the ASX banks. Whilst the S&P/ASX 200 Index (ASX: XJO) has lost around 31% of its value since mid-February, all four of the ASX’s major banks have seen far worse losses.

Commonwealth Bank hit a 52-week high of $91.05 in February. Today, its shares are trading for $61.44 – a 32.52% swing.

And it only gets worse from there. Westpac Banking Corp (ASX: WBC) has lost around 38% from its February high and is on a current share price of $16.04 (a GFC-level low).

Australia and New Zealand Banking Group (ASX: ANZ) has also notched up a 40% loss since February.

National Australia Bank Ltd (ASX: NAB) shares aren’t fairing any better. NAB shares are down around 43% over the past month to levels not seen this century.

These new lows would be pricking the ears of ASX dividend investors everywhere. The ASX banks have long been famous for their market-leading, fully franked dividends.

And at current prices, all four banks are displaying mouthwatering trailing dividend yields.

CBA is seemingly offering a raw yield of 7.03%.

Westpac has a trailing yield of 10.85%.

NAB’s yield is sitting at 10.53%.

And ANZ is coming in with a 9.9% offering.

Too good to pass up, right?

Well, perhaps not.

Beware of the dividend trap!

A dividend trap refers to a situation where a company’s trailing dividend yield looks too good to pass up and investors flock in to ‘lock-in’ the yield.

The only problem is that a company has no obligation to continue paying a dividend at the previous year’s level. And if investors are buying these dividend shares for the high yield, they are risking being ‘trapped’ into their investments with a smaller dividend (or even none at all).

And when yields are this high for the ASX banks, you can almost bet that the market is pricing in a 2020 dividend cut.

Anyone who thinks they are getting a 10.85% yield from now until Judgement Day from Westpac is taking a very big gamble.

Banks’ share prices have been obliterated for a reason – and that’s the new paradigm of ‘zero interest rates’. This situation will massively damage the banks’ ability to make money at historical levels – and that in turn puts enormous pressure on their ability to pay dividends.

Foolish takeaway

For this reason, I would caution against buying a heavy position in the ASX banks today for dividend income. There is a high likelihood that the banks will substantially slice their dividends this year as a result of low interest rates and the coronavirus situation. And thus, there is a real risk of a ‘dividend trap’ with ASX bank shares today, in my opinion.

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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.