Should ASX income investors buy Westpac shares for dividends?

Can we bank on those dividends?

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Owning Westpac Banking Corp (ASX: WBC) shares has been rewarding for dividend income for a number of years. The ASX bank share may be attracting ASX income investors, so is it a good option?

Westpac is one of the largest businesses in Australia, with a market capitalisation of $90 billion according to the ASX. The Westpac share price has climbed more than 20% in the past three months. Despite the much higher valuation, it still offers a good dividend yield.

Westpac dividend forecast

The forecast on Commsec suggests Westpac could pay an annual dividend per share of $1.44 in both FY24 and FY25.

At the current Westpac share price, it means the cash dividend yield could be 5.5%, or a grossed-up dividend yield of 7.9%. That's a lot more than what someone can get from a Westpac term deposit.

In FY26, the ASX bank share is forecast to pay an annual dividend per share of $1.46, which would amount to a cash yield of 5.6%, or 8%, when grossed up.

Should ASX income investors buy it?

It appears the bank is likely to pay a fairly consistent dividend over the next few years. Of course, a dividend payment is not guaranteed – that's up to the board of directors to decide based on the level of profit.

Banks are currently facing a difficult environment with strong competition, rising arrears (amid higher cost of living) and lower demand for new credit.

The Westpac first quarter update showed it made $1.5 billion of net profit, which was down 6% on the FY23 second half quarterly average. Earnings per share (EPS) is expected to fall in FY24 and then fall again slightly in FY25.

Earnings usually drive a share price over the longer term, so the recent rally seems to be related to an increase in investor confidence rather than a positive outlook for profit in the medium term.

According to the prediction on Commsec, the Westpac share price is valued at 14x FY24's estimated earnings.

To me, it now seems a bit pricey for the weak growth it's expected to see in the next few years. I think there are other ASX dividend shares that can deliver stronger dividends and more growth in the next three years than Westpac.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 no position in any of the stocks mentioned. 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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