Are ANZ shares a top buy for dividend income?

Can we bank on ANZ shares for passive income payments?

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ANZ Group Holdings Ltd (ASX: ANZ) shares are known for big dividends, but is the ASX bank share worth buying for the passive income?

Dividends can be a great way to receive investment returns because we don't need to worry about timing the selling of shares. Large dividend yields may provide a lot of the return needed to keep up with the overall share market's return.

Let's have a look at whether dividends can make ANZ shares attractive enough to buy.

How big could the ANZ dividend be?

The dividend is decided by the board of directors, with the company's profitability playing a key role.

It's a tricky environment for banks at the moment because the net interest margin (NIM) is being challenged due to competition in the sector. Arrears are on the rise as some people struggle with making timely repayments amid the high interest rates.

A fall in profit may be on the cards according to some analysts' projections.   

The forecast on Commsec suggests ANZ's earnings per share (EPS) could fall to $2.235 in FY24, while the broker UBS thinks the ANZ EPS could be just $2.11.

This decline in profit is projected to lead to dividend cuts in FY24. The projection on Commsec suggests a possible dividend per share of $1.62 which would be a dividend yield of 5.7%. The UBS estimate suggests the ANZ yield could be 5.2%.

Franking credits are a boost on top of the above yields, though the latest ANZ dividend wasn't fully franked, so I'm not going to predict what the grossed-up dividend yield could be.

Both the Commsec and UBS estimates suggest the ANZ dividend yield could increase in single-digit percentage terms in each of the subsequent financial years.

Is the ASX bank share a buy?

The broker UBS doesn't think so. It has a neutral rating on the bank, but a price target of just $25. That suggests the ANZ share price could drop more than 10% over the next 12 months.

However, UBS did note that ANZ has broader earnings diversification relative to peers, it has an undemanding valuation and it has "growth optionality, especially with regards to its recently-announced acquisition" of the Suncorp Group Ltd (ASX: SUN) banking operations.

I don't think the ASX bank share is a great buy after rising quite a bit (and becoming more expensive) in the last five months, as we can see on the chart below.

Its profit may not grow much in the next few years, so I'm not expecting the ANZ share price to rise much either. The ASX bank share could produce positive returns, but it could be better to go with other investments with more growth potential in my opinion.

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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