Australia's big banks have long been favourites among dividend investors, with their fully franked payouts forming the backbone of many income-focused portfolios.
Commonwealth Bank of Australia (ASX: CBA) is the sector leader, boasting market dominance and a history of consistent dividend growth. Westpac Banking Corp (ASX: WBC), meanwhile, has been working through a turnaround, but still offers one of the more generous yields among the big four.
While both banks remain pillars of the ASX 200, the gap between their income profiles has widened.
Commonwealth Bank has been the standout performer among the big four in recent years. Its shares are up more than 137% over the past five years. That strength has come with a trade-off: its fully franked dividend yield has shrunk to just 2.8%, well below its peers.
Commonwealth Bank continues to grow dividends: its FY25 dividend rose to $4.85. However, as the share price has surged so far, income seekers today get much less bang for their buck than in past years. For context, two years ago, CBA was trading on a 4.3% yield, whereas at the time of writing, the yield is only 2.85%.
While Commonwealth Bank's dominance and premium valuation reflect investor confidence in its market leadership, Macquarie analysts currently rate the stock as underperform, arguing that its near-30x price-to-earnings multiple isn't fully supported by macro fundamentals.
Westpac Banking Corp
Westpac has been recovering from a tougher stretch. Its shares rose more than 10% in August following a well-received quarterly update. UBS analysts noted improving margins and solid business banking growth, though the consumer division remains a "work in progress."
Broker forecasts suggest a degree of caution. UBS has a $36 price target, implying a potential decline of around 5% from today's levels. Westpac is also valued at more than 18x estimated FY26 earnings, which is not historically cheap for Westpac.
For income investors, though, Westpac looks more attractive than CBA. Its fully franked dividend yield sits near 4%, well above CommBank's. That could appeal to investors prioritising passive income rather than share price rises.
The bigger picture
According to Macquarie research, four key macro factors drive bank performance: housing, sentiment, construction, and the labour market. With housing affordability stretched and consumer sentiment subdued, these remain headwinds. The labour market, however, is still a relatively bright spot.
Commonwealth Bank has outpaced its peers despite these mixed fundamentals. Westpac, meanwhile, is showing signs of operational improvement but still faces execution risk.
Foolish Takeaway
Commonwealth Bank shines as the market darling with consistent growth and premium pricing, though its dividend yield is modest. Westpac offers stronger passive income today, but with more moving parts that need to align for sustained growth.
For investors comparing the two, the choice may come down to whether you value stability and long-term premium pricing (CBA) or higher current income with a turnaround story (Westpac).
