The National Australia Bank Ltd (ASX: NAB) dividend yield has been consistently higher than its Big Four peers and a staple at the top of the top dividend stocks in the S&P/ASX200 Index (ASX: XJO) – but how long can NAB maintain its juicy payout?
NAB's dividend versus its peers
NAB currently yields an impressive 7.89% p.a. for investors which compares favourably to that of Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) which currently yield 6.03%, 6.03% and 7.09% p.a., respectively.
NAB's dividend yield even approached nearly 12% p.a. at the end of last year as the share price fell on the revelations of widespread misconduct came out of the Financial Services Royal Commission.
That figure is right up there with the likes of Alumina Limited (ASX: AWC), in as the top income stock in the ASX200 – particularly given the significant structural barriers in the Australian banking system that protect NAB's operational and financial viability.
Two words: regulatory requirements
Australia's top financial cop, the Australian Prudential Regulatory Authority (APRA), is responsible for regulating conduct within the Australian banking system. While APRA wears many hats, one of its primary goals is to ensure the stability and efficient operation of the banking system in this country.
One way in which APRA does this, in line with global regulations known as "Basel III", is to ensure that the domestic systematically-important banks (D-SIBs) – being the Big Four – maintain their minimum capital levels above its target levels.
While there are several key ratios that the banks must maintain, arguably the most important one (and that could have the biggest impact on NAB's dividend) is the Common Equity Tier 1 (CET1) ratio.
The CET1 ratio is calculated as the group's common stock versus its risk-weighted assets (RWAs), which predominantly comprises the bank's loan book which is weighted according to the level of risk typically involved with each type of loan.
In July 2017, APRA announced its "unquestionably strong" benchmark level for CET1 capital that requires the four major Australian banks to have CET1 capital ratios of at least 10.5% by 1 January 2020.
Based on 31 December 2018 regulatory disclosures, while ANZ (11.3%), CBA (10.8%) have exceeded the benchmark with a year to spare, and Westpac (10.4%) is not far behind, NAB's CET1 capital ratio of 10.0% means it has some work to do.
While the bank should be able to find the capital within a year, the delayed sale of its MLC wealth business means that it will need to free up some common equity somewhere – and the easiest way to do that is a reduction in cash payments to shareholders.
Given the negative signal that a dividend cut sends to investors, and the horror 18 months that NAB's shareholders have endured as they watched the share price tank 19.33% over the course of calendar 2018, it will be interesting to see what course of action NAB's management take with the deadline fast approaching.
With those who are looking for more growth than dividends, I'd suggest checking out these top growth shares could prove to be market-beaters in 2019.
