ASX big bank dividends are a write-off in FY20 but are set to rebound as we head into the new financial year.
The question is which of the big four dividend favourites will generate the best yield for income seeking investors in FY21?
The answer isn't quite as straightforward to work out. While we are very likely to see a dividend recovery in the near-term, the payouts are unlikely to match pre-COVID-19 levels for at least a few years.
How to value the big banks
But trying to work out what the dividend is going to be is important as dividends are the primary driver for the sector, in my opinion.
Morgan Stanley throws in credit quality and capital on top of dividends as key considerations for the sector as it calculates what is a sustainable payout for the sector.
The risk of loan defaults and capital adequacy are important in so much as how they relate to dividends though, but that's just my opinion.
Key things you should know about ASX bank dividends
On that note, there are some interesting findings from Morgan Stanley. Firstly, the broker doesn't believe dividends will return to FY19 levels until sometime after FY22 as dividends forecast for that year will still be around 25% lower than last financial year.
However, it believes that dividends will trough in FY20 before staging a gradual recovery. This means dividends are set to rise over the next few years.
Further, the average dividend payout ratio in FY22 is estimated to be 64%. That's well below the 80% plus range that the big four were coughing up during in their heydays.
But the 64% is still high by global standards as US and UK banks are only expected to pay out 32% and 47% of their profits as dividends, respectively, according to Morgan Stanley's estimates.
The ASX big bank with the best yield
Coming to the main event, the ASX big bank with the best forecast dividend for FY21 is Westpac Banking Corp (ASX: WBC).
The broker is tipping a $1.05 a share distribution for the next financial year, and that increases to $1.20 in FY22.
This gives Westpac a net yield of 5.8% in FY21 and 6.6% the following year. Throw in the franking and the gross yield shoots up to 8%-9%.
How the other banks' dividends compare
Next on the dividend leader board is Australia and New Zealand Banking GrpLtd (ASX: ANZ). The stock is sitting on an expected net yield of 5.6% in FY21 and 6.7% in FY22.
National Australia Bank Ltd. (ASX: NAB) is in third place with a net yield of 5.1% next year and 5.9% in FY22, while Commonwealth Bank of Australia (ASX: CBA) is sitting on an expected yield of 4.9% and 5.4% for the two years, respectively.
Foolish takeaway
I won't necessarily say that the big bank with the best yield right now is the top buy. The yields can change as bank share prices fluctuate, so WBC may not hold on to its crown next week.
What I will say is that even CBA's gross yield (lowest of the lot) of 7% is looking quite appealing in this record low interest rate environment.
CBA has the strongest balance sheet and is arguably the best placed big bank. So, while it's the most expensive of the big four and has the skinniest yield, it remains my top pick in the sector given the uncertain times we live in.
