Is the NAB share price a buy for its 6.8% dividend?

Is the National Australia Bank Ltd (ASX: NAB) share price a buy for its dividend yield?

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The National Australia Bank Ltd. (ASX: NAB) share price has been tracking very positively in 2019 so far and is up 13%, year-to-date (YTD). This gives NAB a dividend yield of 6.79% if one was to buy in today (which boosts up to 9.71% if you include franking credits).

Like its 'Big Four' compatriots, NAB has been associated for many years with big dividends, and a 6.8% yield is one of the biggest you can get on the ASX at this time. Out of any of the Big Four, NAB actually has the highest yield going forward, even after cutting the dividend recently by 16%.

NAB is a long way from its 52-week high of $29 and even further away from its all-time high of $41.46 it reached way back in November 2007.

So is NAB a buy for its dividend at these levels?

Along with the other banks, NAB was caught up in the fallout from last year's Royal Commission (which had dragged the share price down considerably over the past year) but the compensation scheme is now well-known and this seems to be behind us now.

However, the financial outlook for the banks is murky going forward. The Australian property market, fuelled by low interest rates, has become saturated over the past decade with record high property prices. This means that property loans are not likely to keep giving large growth numbers going forward as what we have experienced over the last 10 years. If there is any kind of property market correction, this will hurt the banks' bottom line. Similarly, NAB is also significantly exposed to business loans and if there is an economic recession, NAB will likely suffer from this as well.

So what's the bottom line?

NAB is currently paying out around 80% of profits as dividends, so this gives NAB a small cushion against any earnings shocks. If there is a significant change in business conditions, the dividend will be under threat, but even if it is cut by half, NAB will still be yielding much better than a term deposit or savings account. Therefore, I believe that NAB is a good option for income investors, but personally I would not be over-allocating NAB in my portfolio and would balance these risks with more defensive dividend payers like Coles Group Ltd (ASX: COL) or Sydney Airport Holdings Pty Ltd (ASX: SYD).

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited. The Motley Fool Australia owns shares of COLESGROUP DEF SET and National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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