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Is the CBA share price a buy for the 8% dividend yield?

Tristan Harrison
commonwealth bank CBA

Is the Commonwealth Bank of Australia (ASX: CBA) share price a buy for the grossed-up dividend yield of almost 8%?

Commonwealth Bank may not look cheap compared to the share prices and dividend yields of Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ), but it’s probably my preferred big bank at the moment.

Since the end of September 2019 its share price has drifted lower by around 4%, so it’s always nice to see shares become better value when we’re looking to buy. CommInsure currently faces criminal proceedings from the Commonwealth Director of Public Prosecutions and other royal commission related issues, but I don’t think that really changes the attractiveness of CBA as an investment.

What’s more concerning is that Commonwealth Bank may face short-term earnings pressure if there’s more large remediation charges to come, like the market saw with National Australia Bank Ltd (ASX: NAB) recently.

But it seems to me like things are looking up for the largest bank. Commonwealth Bank is more focused on the domestic mortgage market than say NAB and ANZ, where they generate a higher percentage of their earnings from businesses, so CBA should benefit more from the recovery of the housing markets in Sydney and Melbourne than its rivals.

It was the potential for higher bad debts over the past year from a falling housing market that could have caused the CBA dividend to be cut, but now prices are headed up again. There will always be pockets of mortgage distress but CBA would get its money back as long as a house sale price repaid the loan – lower house prices could have meant there was negative equity even after the house sale.

Lower interest rates are helping loan affordability and could see credit growth return to more normal levels. 

Foolish takeaway

The Commonwealth Bank dividend has been grown or maintained in each year since the GFC. It has been a solid dividend payer and it has balanced the needs of the bank and shareholders wisely.

It’s currently trading at just under 16x FY20’s estimated earnings. CBA would be my pick of the big four banks for higher-quality dividends, but I think there are plenty of better ASX dividend shares. There’s a lot of competition against CBA these days. 

For example, I reckon these leading ASX income picks would be safer and offer more growth over the longer-term.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 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