Commonwealth Bank of Australia (ASX: CBA) offers a large fully franked dividend yield of 5%, is this too good to miss?

Commonwealth Bank of Australia or CBA is Australia’s largest bank, with commanding market share of the mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, 14.1 million are in Australia. It is entrenched in the Australian payments ecosystem and financial marketplace.

Commonwealth Bank’s Dividend

Over the past 20 years Commonwealth Bank has been one of Australia’s leading dividend shares.

In March 1999 it paid a fully franked dividend per share of $0.49. In March 2019 it paid a fully franked dividend of $2 per share. In 20 years it has increased the dividend by more than 300%. That is a solid outcome investors when you think about the capital growth of the share price as well. However, the dividend growth has mostly stopped in recent years.

It has been a major beneficiary from the fact that Australia hasn’t had a recession for more than a quarter of a century combined with a strong price performance by Australia’s and New Zealand’s house prices. National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Group (ASX: WBC) have also been large beneficiaries.

Commonwealth Bank Outlook

The outlook for Commonwealth Bank has improved in recent weeks after a number of announcements such as APRA reducing the interest rate buffer required by the banks from 7% to 2.5% above the rate actually paid by borrowers.

Another recent positive has been the RBA decreasing the interest rate by 0.25% with more rate cuts expected over the coming months.

However, there is still the larger problem of the fact that CBA’s mortgage arrears have been rising and house prices have been falling.

What Returns Can We Expect From Commonwealth Bank?

Earnings and share prices are hard to predict over the shorter term, particularly for the banks. However, it seems quite clear that a lot of the returns going into the future will be from dividends rather than capital growth at the current share price of around $80.

I think the risks far outweigh the potential rewards with Commonwealth Bank. There are other alternatives with higher dividend yields like Vitalharvest Freehold Trust (ASX: VTH) and Naos Emerging Opportunities Company Ltd (ASX: NCC) which don’t face as large national economic risks.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).

At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.