The Commonwealth Bank of Australia (ASX: CBA) share price could be one to think about as a buy for dividends.
I’m not typically a fan of large ASX shares for dividends because of their limited growth potential. But I’m willing to consider it.
There are a few different reasons why CBA shares might be good for income:
High dividend payout ratio
Large blue chip shares are (likely) no longer thinking about investing heavily for growth. That means they don’t need to retain as much profit and can pay it out to shareholders instead.
Whatever the company’s valuation, the higher the payout ratio, the higher the dividend yield will be.
CBA used to have a high dividend payout ratio before COVID-19 and I expect that the bank will increase the payout ratio as conditions hopefully normalise.
Strong capital levels
The big ASX bank has a very good level of capital at the moment thanks to the careful management of capital over the last 18 months. Asset sales have also helped increase the capital ratio.
Bank boards, including CBA’s, are probably thinking about releasing some of that capital to shareholders in the form of some sort of cash returns. That should directly or indirectly help CBA’s future dividends per share.
At the latest update, for the period ending 31 March 2021, the common equity tier 1 (CET1) ratio improved another 10 basis points (0.10%) to 12.7%.
Recovering profits
CBA is seeing its profit improve compared to last year which included high levels of provisions against loan losses.
Limited loan provisions in FY21 should mean that the bottom line improves against FY20, even if the underlying profit (excluding provisions) hasn’t changed.
The same dividend payout ratio as FY20 should organically result in a higher dividend in FY21.
CBA dividend expectations
According to CommSec, which doesn’t get info from the CBA board (it just displays external data), CBA is expected to pay fully franked dividend yield of almost 4% in FY22 at the last CBA share price.
Summary thoughts
CBA is probably the best bank in Australia. The dividend does look as though it’s going to recover. But growth after this initial recovery looks like it will be limited. It’s not the type of business I’d go for because I like to find growth as well as yield.
There are other ASX dividend shares on my radar that attract me more.
