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

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

| 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 Commonwealth Bank of Australia (ASX: CBA) a buy for income with its 7.5% grossed-up dividend yield?

The issue for many people in retirement is that risk-free returns have been decimated. Term deposits could easily return more than 5% earlier this decade and now they pay less than 2%. If you had $1 million in cash you would be lucky to make $20,000 a year from it. How depressing is that?

There seems to be only two options to me. Either eat into the capital or invest in 'risk' assets.

People seem comfortable thinking about investing in large banks like CBA, Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) because they are known for their dividend yields and are some of the largest businesses in Australia, meaning they should be reliable.

But of course, NAB and Westpac were not reliable in FY19. Even after excluding significant items, Westpac's cash earnings fell 4% and the dividend was cut by 15%, NAB's dividend was reduced by 16%. Australia and New Zealand Banking Group's (ASX: ANZ) franking credit level was reduced in FY19.

CBA maintained its annual dividend at $4.31 per share in FY19 and in the September 2019 quarter it grew its continuing underlying cash profit by 5%. I think that's a solid growth rate for the current economic situation in Australia with very low credit growth.

However, with Australia's booming house prices there could be a return to decent credit growth – that's all CBA needs to remain a solid dividend share, as long as there isn't an Australian recession.

Foolish takeaway

Of all of the domestic ASX banks, I think CBA could be the best choice for dividends and total returns. Higher profits should translate to higher share prices over time. But, it definitely isn't my preferred choice for dividends out of all ASX shares.

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

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
Dividend Investing

Are CBA shares still a good buy today for passive income?

Looking to earn passive income from ASX dividend stocks? Here’s my take on CBA shares.

Read more »

Shocked office worker staring at computer screen with colleagues working in the background.
Bank Shares

The ASX bank share beating CBA in 2025

Many investors might not realise this smaller bank stock is leading the pack this year. 

Read more »

man thinking about whether to invest in bitcoin
Bank Shares

Here's what needs to happen for the CBA share price to try and reach $200

What could drive the CBA share price higher?

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
Bank Shares

Why now could be an opportune time to sell CBA shares

A leading expert offers his verdict on the outlook for CBA shares.

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Bank Shares

The Westpac share price is a buy – UBS

The broker is optimistic on Westpac shares.

Read more »

Bank building with the word bank on it.
Bank Shares

The biggest buyers and sellers of ASX 200 bank stocks revealed

Macquarie breaks down who’s been buying and who’s been selling the ASX 200 bank stocks.

Read more »

A young woman sits with her hand to her chin staring off to the side thinking about her investments.
Resources Shares

Should I switch my ASX 200 banking stocks for ASX 200 miners before earnings season?

The ASX 200 Index is dominated by Australia's bank and materials/mining sectors, which together account for around half of the…

Read more »

A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.
Bank Shares

Here's when Westpac says the RBA will now cut interest rates

The RBA surprised everyone by keeping rates on hold last week. So, when will the next cut happen?

Read more »