Looking at the Westpac Banking Corp (ASX: WBC) share price today, especially against the other big four ASX bank stocks, it's obvious that Westpac is a front-runner when it comes to dividend income.
All ASX bank shares have a reputation as being some of the heaviest hitters on the S&P/ASX 200 Index (ASX: XJO) in the quest for fully franked dividends. But as it stands today, Westpac is the clear leader out of the big four.
To demonstrate, Westpac currently commands a dividend yield of 6.77%. That's built upon the bank's recently announced final dividend for 2023 of 72 cents per share, as well as the June interim dividend of 70 cents per share.
By comparison, ANZ Group Holdings Ltd (ASX: ANZ) shares currently offer a trailing dividend yield of 6.28%.
National Australia Bank Ltd (ASX: NAB) shares have a yield of 5.96% on the table today.
And Commonwealth Bank of Australia (ASX: CBA) trails the pack with its present dividend yield of 4.42%.
So is this case closed for Westpac being the king of the ASX bank shares when it comes to dividend income?
Why do Westpac shares offer the highest dividend yield right now?
Well, the first thing to note is that while Westpac leads the big four in terms of dividend yields today, it does fall short of what some of the smaller ASX bank shares offer.
Right now, Bank of Queensland Ltd (ASX: BOQ) shares pip even Westpac, with a stonking yield of 7.45% on display today.
Bendigo and Adelaide Bank Ltd (ASX: BEN) doesn't quite hit that high. But its current yield of 6.75% puts it on par with Westpac. However, we won't discuss these banks in comparison to Westpac because they simply lack the size and scale the big four banks can offer investors.
So why does the Westpac dividend yield come in so much higher than the other ASX big four banks?
Well, a lot of it has to do with the company's valuation.
How does the Westpac share price compare to the other big four?
Westpac currently trades in the lowest price-to-earnings (P/E) ratio out of all the big four. The P/E ratio is a useful metric when comparing similar companies because it tells us how much investors are currently paying for the same $1 of earnings that different companies are making.
Right now, Westpac shares are trading on a P/E ratio of 10.86.
That compares with a P/E ratio of 11.05 for ANZ, 12.36 for NAB, and 17.04 for CBA. If a share's P/E ratio is higher than another share, it tells us that investors are pricing the company at a higher premium. And that tends to lower a company's current dividend yield.
Thus, it's no coincidence that Westpac, the bank with the lowest P/E ratio, also has the highest dividend. Conversely, it should surprise no one to see that CBA, with its lofty P/E ratio, also offers a far lower dividend yield today.
So while Westpac is certainly king amongst the major ASX banking stocks right now, it can also be considered a pauper because investors are giving its shares the lowest valuation out of the big four.
Foolish takeaway
As such, investors considering Westpac for its dividend potential have to ask themselves why Westpac is getting such short shrift from investors. It could be Westpac's quality as a company, or its large portfolio of residential mortgages compared to the other banks. Perhaps investors don't have as much confidence in Westpac's management team, or possibly its brand power, going forward.
Either way, Westpac still has plenty of dividend income to offer investors today. The choice is whether its income potential makes up for the perceived quality gap the market seems to be implying.
