Is the CBA share price a buy for the 7.5% dividend yield?

Is the Commonwealth Bank of Australia (ASX:CBA) share price a buy for the 7.5% dividend yield?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Is the Commonwealth Bank of Australia (ASX: CBA) share price worth buying for the grossed-up dividend yield of 7.5%?

The big four ASX bank's share price has gained an impressive 15% since the start of April, which has had the unfortunate effect of decreasing the dividend yield.

Therefore, I think it's worth asking whether the CBA share price is worth considering with a higher valuation and lower dividend yield.  

I believe it's important that we have a good understanding of how we will benefit from the cashflow generated from our businesses. The big banks of CBA, National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) are clearly mature businesses where most of the return will come from dividends.

It does seem as though the short-term outlook for the banks has improved. I'm not sure if the election win by the Liberals really changes anything, but the APRA interest rate buffer change the RBA interest rate reduction could have help credit growth and also perhaps improve the situation for borrowers are getting into arrears with CBA and the other banks.

As the RBA cuts rates further and further it makes living off interest in the bank almost impossible, so a flight to dividend shares may almost be unavoidable. Is CBA the right option for that? I don't think it is. These ultra-low interest rates could have a very odd effect on banks – they may lend money to people or businesses that they may ordinarily not have because those riskier borrowers can afford the loans due to the lower repayments.

Lower interest rates from the RBA may result in a smaller net interest margin (NIM) for CBA.

Foolish takeaway

There's a lot of competition in the banking sector. Although this is a dangerous phrase to say, I have a feeling the 'easy' gains have been made with CBA shares this year. The requirement to hold more capital could also be a drag on profit over the medium-term.

CBA is trading at 16x FY20's estimated earnings. I would not feel confident investing in CBA shares today. I'd at least want to see a return to Australian house price growth before considering CBA shares for income.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of 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.

More on Bank Shares

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Major CBA investor reveals why he's all in

This investor described one major reason driving his investment in CBA shares.

Read more »

Young investor sits at desk looking happy after discovering Westpac's dividend reinvestment plan
Bank Shares

Invested $10,000 in Westpac shares 2 years ago? Guess how much you've already banked!

Atop their regular dividend payments, Westpac shares have enjoyed a strong two-year run.

Read more »

Woman calculating dividends on calculator and working on a laptop.
Bank Shares

Buying CBA stock today? Here's the dividend yield you'll get

CBA's yield right now might surprise you.

Read more »

A financial expert or broker looks worried as he checks out a graph showing market volatility.
Bank Shares

How much would the ASX 200 fall if CBA shares returned to 'fair value'?

CBA shares account for 12% of the ASX 200.

Read more »

A woman sits in a cafe wearing a polka dotted shirt and holding a latte in one hand while reading something on a laptop that is sitting on the table in front of her
Dividend Investing

How are these passive income investors earning a 7.5% dividend yield on their surging CBA shares?

CBA shares are proving more lucrative for some passive income investors than others.

Read more »

A woman in a bright yellow jumper looks happily at her yellow piggy bank.
Bank Shares

$10,000 invested in CBA shares in FY25 is now

Let's see whether it was a successful 12 months for bank investors in the last financial year.

Read more »

Woman with spyglass looking toward ocean at sunset.
Bank Shares

What could happen to the big 4 banks in FY26?

What’s in store for the big four banks over the next 12 months?

Read more »

Bank building in a financial district.
Bank Shares

Which is the only ASX 200 bank stock Macquarie expects to outperform in FY 2026?

Macquarie forecasts a tough year ahead for the ASX 200 banks, with only one expected to outperform.

Read more »