If retirees are looking for income, is Commonwealth Bank of Australia (ASX: CBA) a good option as an ASX dividend share?
The bank is not only the biggest bank in Australia, but it’s also one of Australia’s biggest businesses from any industry.
There are three main areas I like to consider a potential ASX dividend share (for retirees or anyone). Which are these three:
CBA’s dividend yield
A business has to pay a pretty good yield to classify as a dividend option. These days, the required yield to count as an ASX dividend share is a bit lower because of how low interest rates are right now.
The bank paid an annual dividend of $3.50 per share in FY21. That translates into a trailing dividend yield of 3.2%, or 4.5% including the franking credits.
A yield can be changed quite a bit by the change in the CBA share price. A higher price means a lower yield and vice versa. In 2021, CBA shares have risen by 31%, pushing down the yield.
I suppose in this era that a yield of 4.5% isn’t bad. So it ticks the box here.
Reliability
Ideally, an ASX dividend share is able to grow the dividend most years and at least maintain during difficult times.
Banks are heavily linked to the economy, so every time there is a recession, a bank may see a rise in provisions for bad debts. That’s just what happened during the COVID-affected FY20. CBA ended up cutting its dividend by around 30% in FY20. CBA wasn’t able to keep that dividend stable, particularly because banks were instructed by regulators to lower their dividend payout ratios.
Some other ASX dividend shares have grown the dividend for plenty of years in a row including Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), APA Group (ASX: APA), Rural Funds Group (ASX: RFF), Altium Limited (ASX: ALU), Brickworks Limited (ASX: BKW) and Sonic Healthcare Ltd (ASX: SHL).
Dividend growth potential
If a business roughly maintains its dividend payout ratio over the years, then dividend growth will be reliant on long-term profit growth.
As a huge bank in a low growth industry, I don’t think CBA’s profit is going to grow much over the next five years or so years. It’s already massive and there is limited market share it can take, though growth in business lending does offer a bit of potential.
CommSec’s (third party) estimates suggest the CBA dividend will continue to recover, rising to $3.90 per share in FY22 and $4.08 in FY23. However, the FY23 payment would still be less than what was paid each year between FY15 to FY19.
Summary thoughts
CBA wouldn’t be a terrible choice for dividends. But after such a strong run of the CBA share price, it seems expensive and doesn’t offer a lot of potential dividend growth.
There are plenty of other ASX dividend shares, such as some of the ones I mentioned above, that may make more beneficial choices.
