Here are 3 reliable ASX shares I'd buy instead of the big four banks right now

I'm banking on these stocks to pay more reliable dividends than the financial sector.

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Thanks to the strong economy, the ASX bank share sector has done quite well during this period of higher interest rates. However, there are still danger signs, particularly with arrears rising.

In the recent FY24 third-quarter update, we heard from Commonwealth Bank of Australia (ASX: CBA) how its arrears over 90 days have increased. At March 2023, home loans at least 90 days overdue were 0.44% of its loan book, but that had increased to 0.61% at March 2024.

What could this mean for bank earnings?

According to reporting by the Australian Financial Review, brokers Wilsons said:

There is a broad consensus among the banks that bad debts will follow arrears higher over the medium-term amidst weakening credit quality from the still percolating impact of higher interest rates on households.

ASX bank shares are expected to see earnings per share (EPS) decline in FY24 and FY25, according to Wilsons. It described the current valuations as "uncompelling" and said investors should stay "underweight".

Broker Morgan Stanley is concerned about banks' net interest margin (NIM). According to reporting by The Australian, Morgan Stanley said:

In our view, it will be difficult for retail bank margins to expand and profitability to improve given the ambitions of the five largest banks.

We think this limits the potential for a strong recovery in EPS and dividend growth and an increase in sustainable returns.

Where I'd invest in ASX shares

I'd imagine that many investors are attracted to the ASX bank shares of CBA, Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and ANZ Group Holdings Ltd (ASX: ANZ) partly because of the dividend yield.

So, I'll talk about three ASX shares that seem reliable for dividends and offer a good yield.

Rural Funds Group (ASX: RFF) owns a variety of farmland including cattle, almonds, macadamias and vineyards. It has grown or maintained its distribution every year since it first started paying in 2014. Its rental income is benefiting from steady contracted rental increases at its farms. The business currently has a distribution yield of 5.8%.

Medibank Private Ltd (ASX: MPL) is Australia's largest private health insurer. Many households value having access to private health, and some high-income people are benefiting from avoiding the Medicare levy surcharge by having private health insurance. Its policyholder numbers keep growing and this is helping its underlying profit grow. Commsec forecasts suggests a grossed-up dividend yield of 6.6% in FY25.

Telstra Group Ltd (ASX: TLS) is Australia's largest telecommunications business, with leading 5G network coverage. The ASX share continues winning new subscribers and this is helping drive its profitability higher, as well as funding more investment across its business. It's growing its dividend again and has a projected grossed-up dividend yield of 7.3% for FY25, according to Commsec.

Motley Fool contributor Tristan Harrison has positions in Rural Funds Group. 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 Rural Funds Group and Telstra Group. 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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