National Australia Bank Ltd. (ASX: NAB) shares are forecast to pay a meaty dividend yield of 6.4% fully franked, but the question on everyone's mind is: is it safe?
Bigger is not always better
You could run a 'stock screen' or 'filter' for Australian shares that pay big dividends. In fact, in the blink of an eye, your brokerage account could rank all 2000+ shares on the ASX from the largest dividend to the smallest.
You might also choose to include only companies with tax-effective franking credits, which can boost Australian residents' after-tax income.
However, as you know, buying shares based solely on what that filter spits out could be an overwhelmingly bad idea.
You may as well pin-up the logos of 100 companies on a wall and throw darts at them blindfolded.
Bullseye
NAB's dividend has stood the test of time.
Yes, its dividend was lowered during the Global Financial Crisis (GFC). But it was only a slight reduction in its payout – it still paid a handy cash return to worried investors.
However, prudent investors realise that the sharemarket is forward-looking – we don't invest by looking through the rear-view mirror, as good as the past may look.
Therefore, successful dividend investing dictates that we must make informed forecasts about the company's future profits to determine the sustainability of its dividend.
Aside from a market shock, which is bad news for everyone; looking ahead, I believe NAB's dividend will be sustainable so long as its bad debt charges (i.e. the cost associated with business owners and mortgagees who cannot repay their loans) remains subdued. Currently, NAB and peers like Commonwealth Bank of Australia (ASX: CBA) have very low charges for bad debts, thanks to record-low interest rates.
Broadly, low-interest rates have made repayments less of a headache for Australians.
Fortunately, although interest rates are expected to increase modestly in the years ahead — it will be a modest rise.
Foolish Takeaway
Aside from any black swan events, a severe market crash or a recession, I believe NAB's dividend will continue to be paid.
However, I am not buying NAB shares today because I do not believe they are a bargain. As savvy investors know, a falling share price can quickly wipe out the benefit of a 6% dividend.
