Commonwealth Bank of Australia (ASX: CBA) shares are offering a fully franked 5.2% dividend yield.
Share dividends 101
When you are weighing up a dividend, it's important to remember that they are not guaranteed. Some term deposits, however, are guaranteed.
For example, a term deposit with a major bank like Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) will pay you around 2.5% interest a year. After tax (up to 49% of the interest) and inflation — currently, 2.1% — your money will not be working for you.
But as bad as that is — it sucks, I know — your money is as close to guaranteed as you will find. For some banks, the Australian Government guarantees up to $250,000 per person per bank. That doesn't mean you are guaranteed your 2.5% interest payment, but it means the Government will protect your capital if the you-know-what hits the fan.
CBA's dividend yield is currently 5.2% with franking credits, which are like 'tax credits' stored against your name at the ATO. Adjusting for the franking credits, CBA's comparable dividend yield is 7.4%. Therefore, even after tax and inflation, you would still be well ahead of the term deposit interest rate.
However, if the you-know-what hits the fan, CBA's dividend would be reduced or cut entirely. The value of your shares could also take a big haircut. That's because common shareholders rank as the lowest priority in the capital structure of a company. Remember, shares are also called 'equities'.
Think of it like your mortgage. If you — the owner of the 'equity' in the house — can't make the repayments, the bank will pull rank and take the house from under you.
However, as can be seen below, CBA's dividend has not been cut for a while…
CBA's half-yearly dividend payments
The graph above shows CBA's half-yearly dividend payments. The little ups and downs are the difference between the 'interim' dividend and the 'final' dividend, which are usually larger.
So what can we say about Commbank's dividend?
I'd say, it's not guaranteed, but it is reliable.
How much are CBA shares worth?
As all good investors know, the benefit of a dividend yield can be quickly wiped out by a falling share price. There's no feasible way to protect your investment from the general ups and downs experienced in the financial markets over the short run.
Good investors accept this 'volatility' and buy shares when they are priced less than what they are worth. At the moment, I do not believe CBA shares are cheap. Therefore, I think the odds of failure are higher at the moment than they could be if investors chose to wait for a better time to buy. So that's what I'm doing.
In the meantime, CBA's dividend will be staring me in the face.
