Are Commonwealth Bank (ASX:CBA) shares an ASX dividend buy today?

Commonwealth Bank of Australia (ASX: CBA) looks like it will be raising its dividend in 2021. Are CBA shares a buy for income today?

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Commonwealth Bank of Australia (ASX: CBA) shares have seen their reputation for dividends take a hit in 2020. In 2019, CBA shares paid out 2 dividends to its investors – an interim dividend of $2 and a final dividend of $2.31 per share.

In 2020, investors have also received 2 dividends – an interim dividend of $2 and a final dividend of 98 cents per share. That's a total payout of $2.98 for 2020, in contrast from the $4.31 that shareholders received in 2019.

Not that this dividend cut is entirely CBA's fault. The coronavirus pandemic and associated economic shutdowns have been devastating to the entire ASX banking sector. All of the banks have implemented 'mortgage freeze' policies for landlords and occupiers struggling to repay home loans. And various government policies have halted evictions on the grounds of financial difficulty. These are good policies for the economy and society in my view. But unfortunately, they are not good for banking profits.

On top of this, the banking regulator APRA (the Australian Prudential Regulatory Authority) implemented 'guidance' in April (read orders) that dictated that banks shouldn't be paying substantial dividends in 2020 to maintain a precautionary buffer for the financial sector.

APRA later revised this advice in June, telling banking companies that they shouldn't be paying out more than 50% of their earnings as dividends in 2020. CBA's final dividend of 98 cents per share reflected this 'guidance', as it was roughly 50% of CBA's half-year earnings.

Outlook for Commonwealth Bank share dividends

So now the history lesson is over, what can we expect from CBA in terms of dividends from here?

Well, according to reporting in the Australian Financial Review (AFR) this week, future dividend payments were discussed at CommBank's annual general meeting on Tuesday. According to the AFR, CBA chair Catherine Livingstone told investors that the bank "hoped" to restore its dividend payout to around 75% of earnings, but added it was "too early to be precise on when this might occur".

This sounds great for dividend investors. But let's analyse what this might mean.

So in 2020, CBA delivered $4.21 in earnings per share (EPS), of which $2.98 was paid out as dividends. For the 6 months to 30 June, CBA generated roughly $1.96 in EPS, which the final dividend of 98 cents per share comes from (representing a payout ratio of 49.95%, falling within the APRA guidelines).

So if CBA was paying out 75% of earnings, like management is telling investors they would like to, the final dividend would have instead come in around $1.47 per share by my estimation.

That would give CBA shares an annualised dividend yield of 4.27% on current prices.

Foolish takeaway

Although the dividend outlook for Commonwealth Bank shares is brightening, I'm not even sure that the bank will deliver a 4.27% yield in 2021 (although its possible). The reality is that the entire ASX banking sector is facing some massive structural headwinds right now. I'm not confident we will see these headwinds subside for a number of years. As such, I simply think there are better options for ASX dividend income out there today.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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