Commonwealth Bank of Australia (ASX: CBA) shares offer a fat dividend yield of 5.38% fully franked, based on last year's payout.
Commbank's dividend stands tall in a market littered with record-low official interest rates of 1.5% and term deposits yielding only a little more.
Dividend Value
The Reserve Bank of Australia's (RBA) decision to keep interest rates at 1.5% over Christmas would be welcome news to homeowners and retailers like JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN).
But for banks like Commbank and Westpac Banking Corp (ASX: WBC), record-low interest rates can squeeze profit margins and result in lower dividends to shareholders.
Looking ahead it is not hard to envisage an Australia with higher interest rates and that could mean an injection of bank profits at least in the short run.
No matter which way you slice it, Commbank is in pole position to benefit from such a trend.
For example, it has the lion's share of mortgages, with good lending standards to boot, and a big chunk of the business market. It also funds its assets (i.e. loans) with a healthy amount of customer deposits, which could keep its profit margins above peers.
Analysts are currently forecasting dividends to grow slowly, too. Based on next year's forecast payment, the bank's current dividend yield will jump to 5.42% — try getting that at the…err, bank.
Risks
Of course, without risk there is no reward. And when you buy shares in any company, you are getting many risks.
Firstly, Commbank shares do not guarantee a dividend — far from it. In fact, regular shareholders rank at the lowest end of the capital structure should the bank become insolvent.
Share prices also rise and fall. Commbank shares sunk from over $60 to $24 in the 18 months around 2008.
Technological risk is also a real threat to banks. While Commbank is best prepared for this development, in my opinion, I believe Google (owned by Alphabet Inc) will be a bigger financial institution in the years to come.
Then there is regulatory risk. Regulatory oversight helps stave off some competition, but it is also a handbrake on growth.
Foolish takeaway
With a dividend of 5.4% fully franked, it is easy to see the appeal of owning Commbank shares. Indeed, they appear cheap from an income perspective.
However, there are risks (some of them are listed above) to owning shares, and dividend yield is a crude measure of a share's value.
In my opinion, investors could do worse than hold Commbank shares today, but I am not a buyer because I think there are other alternatives available.
