What's the outlook for ASX 200 bank dividends?

The ASX 200 big four bank shares are known to be great dividend payers. They're a favourite among retiree investors because they typically dish out greater dividend yields than most ASX shares.

Wait, wait. Yes, it's true that the ASX mining shares and ASX energy shares may pay stupendous dividends this year, and possibly next year, due to the current commodities boom. But that's a cyclical thing.

When it comes to regular, reliable, and strong dividends over the long term you'd be … um, Foolish to ignore the big banks.

What dividend yields are the ASX bank shares paying now?

As my Foolish colleague Sebastian reported yesterday, the dividend yields of the big four ASX bank shares currently range from about 4.2% to 6.6%.

At the top is Australia and New Zealand Banking Group Ltd (ASX: ANZ). ANZ pays a dividend yield of about 6.6% at current share price levels.

Next is Westpac Banking Corp (ASX: WBC) which pays about 6.2% in dividends.

Then there's the business banking specialist National Australia Bank Ltd (ASX: NAB). Its dividend yield sits at about 5.2% at current share price levels.

Last but not least is Commonwealth Bank of Australia (ASX: CBA) at about 4.2%.

All of the big four ASX bank shares pay fully franked dividends. That means you get the maximum tax break possible when you do your tax return.

Retiree investors also love fully-franked dividends because they get paid in cash if their taxable income is beneath the taxable threshold. Bonus!

What about Macquarie dividends?

Should we look at Macquarie dividends too? Seems relevant given the company is often referred to as the 'fifth bank' amongst the big four?

According to Seb's calculations, Macquarie pays 3.8% with 40% franking at the moment. That's pretty good for a banking share that trades at almost twice the price of Australia's largest banking business, CBA.

Remember, the dividend yield is calculated as a percentage of the share price. This week Macquarie is trading in the early $160s. (Fun fact: It was trading above $200 in January before the market correction began.)

So, what's the outlook for ASX 200 bank dividends?

Well, to pay a strong dividend, any ASX business has to make a strong profit. That's how dividend payouts are funded. And some experts believe there are revenue and cost headwinds for the banks.

According to a report in the Australian Financial Review (AFR), analysts have attributed the recent sell-off in ASX bank shares to "fears that sharp interest rate increases will cause an economic slowdown that flows through to the property market and hurts the banks' customers".

Furthermore, this would "potentially bring an end to years of bumper growth in lenders' mortgage portfolios, fuelled by record low interest rates and a booming housing market".

What do the brokers think?

The article quotes fund manager T. Rowe Price, which is "significantly underweight" on the Australian banks.

The manager "believes their earnings could weaken sharply in the next six to 12 months as slowing growth sparks an increase in non-performing loans".

T. Rowe went even further in its gloomy outlook, saying it "would not be surprised if CBA and NAB suspended their most recent buybacks in light of developing macroeconomic conditions".

Equity analyst Nick Vidale said:

As for the outlook for dividends, we think a good outcome for the banks in the coming years would be if they were able to hold dividends flat.

However, Plato Investment Management says ASX bank shares will remain good income stocks in the short term.

Plato's managing director Don Hamson said:

We don't expect dividend cuts in the near future … However, we are less bullish on the potential for further bank buybacks given increased market uncertainty, and the fact that all the big four bought back capital either on or off-market in the past year.

Concerns about rising loss provisions are way overdone. Similarly, we think speculation about a potential recession is way too premature.

Australia has very high employment rates and people with a job usually pay their mortgage.

Given ASX bank shares have been sold off, Plato reckons their dividend yields look even more attractive.

Broker UBS says the major Australian banks are in a good position to handle rising interest rates.

This is largely because the big banks are carrying $15 billion in collective provisions.

Head of Australian bank research at UBS John Storey, said:

There would need to be a substantial blow-up in credit provisions to derail the Australian banks earnings story.