The Commonwealth Bank of Australia (ASX: CBA) share price has risen 4% in a month, but it is offering a potentially tax-effective dividend yield of 5%.
If we include the benefit of its full franking credits, which you can think of as a 'tax credit' which boosts your after-tax income, CBA's dividend yield blows out to a mouth-watering 7.1%.
Try getting that from the ban…
Nevermind.
But as every seasoned investor knows, dividends are not guaranteed. And you may as well get a job as a psychic medium if you think anyone can guarantee the direction of share prices in the short term.
Is the CBA dividend safe?
In my opinion, the only reliable way to get a sense of the safety of a dividend is to understand the business and its industry.
Commbank is Australia's largest bank. And given that it is so important to the Australian economy, the government has an 'implicit guarantee'. Meaning, if the you-know-what hits the fan, the government would be there to bail Commbank out of trouble.
That doesn't mean your dividend is also guaranteed — far from it — but, chances are, you wouldn't be completely wiped out overnight.
Commbank is also very profitable, which bodes well for its cash flow and in turn its dividends. It is the leader in Australian household lending and commands a healthy market share in New Zealand.
But, Commbank also has some risks. One of them is the cyclical nature of the local economy. If the economy slows down and bad debt charges rise CBA would be hit very hard and its profitability would take a dive.
Finally, if you overpay for a company's shares history has proven that you increase your chances of losing money. At today's prices, I do not believe Commbank shares are compelling value.
Foolish Takeaway
Together with the cyclical nature of its business and expensive valuation, I believe income-focused investors will fare better looking at alternatives. Perhaps those companies further down the market.
