National Australia Bank Ltd (ASX: NAB) shares have a reputation for providing pleasing passive income. As one of the largest ASX bank shares, it certainly has a major part to play in the return of the overall ASX share market.
At first glance, there may not be much difference between owning NAB shares and Commonwealth Bank of Australia (ASX: CBA) shares. But, there is a significant valuation difference.
Investors can discuss the merits of whether CBA is worthy of a much higher price/earnings (P/E) ratio than the other ASX bank shares, but it has a significant impact on the dividend yield on offer from the banks. The higher the P/E ratio, the lower the dividend yield.
At the time of writing, CBA has a projected grossed-up dividend yield of 4.5% for FY26, including franking credits, according to the projection on Commsec.
Projected passive income
Large ASX bank shares usually have a generous dividend payout ratio, providing investors with a pleasing dividend yield.
According to the forecast on Commsec, the NAB board of directors could declare an annual dividend per share of $1.74.
At the time of writing, owning NAB shares could provide shareholders with a grossed-up dividend yield of 5.7%, including franking credits.
If those projections come true, that means being a NAB shareholder could give investors more than a whole percentage point of an income return than owning CBA shares.
Let's take a look at what that would translate into in terms of putting $10,000 into NAB shares.
Potential dividends from owning NAB shares
At the time of writing, buying $10,000 of NAB shares could unlock a pleasing level of passive income.
In terms of the cash dividend, it would deliver a projected $400 of annual payments.
Plus, investors could receive another $170 of franking credits, which can be accessed once an Australian investor does their tax return.
That means in total, owning $10,000 of NAB shares could deliver approximately $570 of grossed-up passive income, including franking credits.
Is this a good time to invest in NAB shares?
Ultimately, if I were focused on unlocking passive income, I'd want to buy businesses that grow earnings and hopefully deliver capital growth.
According to the projection on Commsec, NAB's earnings per share (EPS) is forecast to rise to $2.39 in FY25. The ASX bank share could then grow EPS by just over 4% to $2.49 in FY26. NAB ticks the box in terms of (potentially) growing earnings.
That means, at the time of writing, the bank are valued at around 18x FY25's estimated earnings and 17.5x FY26's projected earnings.
Is this a good time to invest? Analysts are mixed on the ASX bank share. According to a Commsec collation of analyst recommendations, there are currently three buy ratings, five hold ratings and six sell ratings. The average rating is a hold, but there are a lot more sells than buys. NAB shares may not be the best pick for passive income right now.
