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Should you buy Commonwealth Bank of Australia shares before they go ex-dividend?

James Mickleboro
commonwealth bank

On Wednesday Commonwealth Bank of Australia (ASX: CBA) shares will go ex-dividend for its interim $2.00 per share fully franked dividend. This dividend will then be paid to eligible shareholders on March 28.

In order to be eligible for it, investors will need to be holding shares in Australia’s largest bank at the close of trade today.

Should you buy Commbank shares today?

Based on its current share price, Commonwealth Bank’s shares currently provide investors with a trailing fully franked 5.7% dividend. While this is undoubtedly a generous yield in comparison to the market average, it isn’t the biggest in the banking sector by a long shot.

As a comparison, the shares of Australia and New Zealand Banking Group (ASX: ANZ) currently provide investors with a trailing fully franked 5.8% dividend.

National Australia Bank Ltd (ASX: NAB) provides the biggest yield amongst the big four with a trailing fully franked 6.9% yield, closely followed by Westpac Banking Corp (ASX: WBC) and its trailing fully franked 6.3% dividend.

In light of this, I wouldn’t be in a rush to invest in CommBank’s shares purely for its upcoming dividend.

In fact, I would suggest investors be patient and wait for the Westpac dividend later this year instead. Traditionally its shares go ex-dividend in the middle of May, before the payment hits eligible shareholders’ bank accounts at the start of July.

As well as offering a greater yield than CommBank, I think Westpac’s shares are much better value and have greater upside potential over the next 12 months.

I’m not alone in this view, either. Last week analysts from Deutsche Bank and Macquarie gave Westpac the equivalent of buy ratings with $34.50 and $35.00 price targets, respectively. Even based on the lower of the two targets, this implies potential upside of almost 15% for its shares over the next 12 months. Add in the dividend and this becomes a lofty 21% potential total return.

CommBank on the other hand, was given an underweight rating and $72.00 price target by Morgan Stanley last week, representing potential downside in the region of 5.5% for its shares. This almost offsets the benefits of its dividend in full.

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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Bruce Jackson.