Are Bank of Queensland shares a buy for the 7%+ dividend yield?

Should income investors turn down this 7.6% fully-franked yield?

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One of the first things that will probably catch your eye when looking at the Bank of Queensland Ltd (ASX: BOQ) share price right now would be its dividend yield. As it stands today, Bank of Queensland shares are trading at $5.76 each, down 0.26% for the day thus far.

At this share price, BOQ shares boast a dividend yield of 7.63%. What's more, this dividend yield comes fully franked. That means this ASX 200 bank stock has a whopping grossed-up yield of 10.9%.

That's more than enough to catch any dividend investor or passive income seeker's eye. Especially considering what is on offer from the other ASX bank shares right now.

This 7.63% yield makes the other ASX banks look like paupers. The next-closest bank in terms of available yield today is Bendigo and Adelaide Bank Ltd (ASX: BEN), at 6.7%.

And sure, ANZ Group Holdings Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) both get reasonably close with their current yields of 6.11% and 6.23% respectively. 

But National Australia Bank Ltd (ASX: NAB) currently has a dividend yield of 5.57% on the table today. And Commonwealth Bank of Australia (ASX: CBA) is almost looking miserly by comparison, with its present yield of 4.44%.

BOQ's divided yield check out too. It comes from the bank's last two dividend payments. There was the interim dividend of 20 cents per share that we saw in June. As well as the 24 cents per share that was distributed to shareholders last November. Together, that annual total of 44 cents per share gives the BOQ share price of $5.76 a dividend yield of 7.63%.

But today, let's discuss whether this rather stupendous dividend yield makes BOQ shares a buy for income investors in September 2023.

Are Bank of Queensland shares a banking buy for income right now?

When I look at a dividend share in terms of its income potential, the dividend yield is only one metric I use in analysing its income potential.

Let's move on to BOQ's payout ratio. The dividend payout ratio is a metric that tells us what proportion of a company's earnings are being paid out as dividends. If a payout ratio is at 50%, it tells us that there is a fat cushion around a dividend, and indicates that a dividend cut is not too likely.

On the other hand, if a payout ratio is at 95%, it might be telling us that the company doesn't have a lot of wriggle room. And as such, the dividend might be in danger of being cut.

Looking at BOQ's last half-year report from April, and it tells us that the 20 cents per share interim dividend came from an earnings per share (EPS) of 39 cents (basic). That gives us a payout ratio of 51%. Last year, BOQ's final dividend of 24 cents per share was drawn from an earnings base of 36.8 cents. That represents a payout ratio of 64.7%.

These are both pretty comfortable figures for a bank and indicate (in my view) that this dividend is built on a very stable and sustainable foundation.

As such, I would argue that Bank of Queensland shares are a buy today for anyone seeking hefty dividend income. This ASX bank doesn't have a great performance track record when it comes to share price growth. In fact, BOQ shares remain down by almost 50% over the past five years:

But for an investor purely seeking dividend income, I think this ASX bank would be a great addition to a diversified, dividend-focused portfolio.

Motley Fool contributor Sebastian Bowen has positions in National Australia Bank and Bank of Queensland. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Bendigo And Adelaide Bank. 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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