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This ASX banking share has a 10.6% dividend. Should you buy?

Sebastian Bowen
is it a buy

No, its not Westpac Baking Corp (ASX: WBC) or Commonwealth Bank of Australia (ASX: CBA). This ASX bank, with its grossed-up yield of 10.61% is none other than the Bank of Queensland Limited (ASX: BOQ).

Yes, you read right – Bank of Queensland is currently paying a 68 cents per share dividend, which on current prices translates to a 7.44% yield, or 10.61% including franking credits. So is this monster yield worth buying BOQ shares for? Or is BOQ a yield trap, with the dividend too good to last?

Who is BOQ?

A bit of an underdog in the ASX financials, Bank of Queensland is one of the few smaller ASX banks with the firepower to take on the ‘Big Four’; another honourable mention goes to Bendigo and Adelaide Bank Ltd (ASX: BEN).

Like many other smaller financial institutions, BOQ started life as a mutual society (back in 1863) before incorporating and listing on the ASX in the early 1970s. The bank only started expanding beyond Queensland in 2004. Today, BOQ has a national presence and differentiates itself with its “banking with a heart” branding, which is a potent selling point considering the fallout the ‘Big Four’ have experienced following last year’s Royal Commission.

Yield or no yield?

All this sounds great, but what do the numbers say? BOQ’s most recent reports do not paint a pretty picture. For 1H19, profits and earnings were both down by nearly 10%, while BOQ’s dividend was also cut by 10%. Bank of Queensland’s management stated that the bank faces many near-term headwinds, including its digital transformation strategy, an unkind regulatory environment, and structural challenges in the financial services industry.

This is worrying to me personally, as BOQ doesn’t have the pricing powers or market share of one of the major banks, and therefore cannot respond to these trends as effectively as a bank like Westpac. Today’s environment of record-low interest rates puts further pressures on the margins of banks, but especially smaller banks like BOQ.

Foolish takeaway

Although BOQ’s dividend is pretty substantial, and places it in the top group of ASX dividend payers, I have many concerns about the future of the dividend, and wouldn’t be too surprised if the dividend was again cut down the road. For anyone seeking good yields, I would humbly suggest another place to put your money today

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019