National Australia Bank Ltd (ASX: NAB) has a grossed-up dividend yield of 14.8%, is it too good to be true? Perhaps.
The trailing half-yearly NAB dividend is $0.83 per share. How likely is it that this will be maintained?
Not likely…
NAB and Australia and New Zealand Banking Group (ASX: ANZ) are the two major ASX banks that more focused on business banking whereas Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) are more focused on the mortgage market.
The worry is that because so many businesses have been forced to temporarily close, it will cause them to miss repayments to the bank. Big banks have actually said they are willing to give individuals and businesses a payment holiday. But that may mean shareholders take a dividend holiday too. No payments means no profit on those particular loans in the short-term.
Indeed, the banks are likely to see rising bad debts over the next few months, which would be a hit on the profit and flow onto a likely dividend cut as well.
How low could the dividend go?
Well, the worst case would be the dividend going to $0 whilst it works through the damage. But it's a good thing that the government is offering a lot of support to the country.
During the GFC the lowest the half-yearly dividend went was $0.73 per share. Annualised, that would be a grossed-up dividend yield of 13%. Even a 13% yield would be pretty good!
But you shouldn't invest in something just because of the dividend.
Don't write NAB off though
Banks have been required by APRA to build up their capital to be able to deal with situations exactly like this; painful economic times that require banks to be unquestionably strong and continue their role in the economy for borrowers and savers.
It may be FY22 before we see a normal full year of earnings again from NAB. The share price is trading at GFC levels, and it may be a decent shorter-term punt, but I think there are more obvious investment ideas for long-term growth out there at cheap prices.
