Why this top broker is forecasting a 7% dividend yield for Westpac shares

This banking giant could provide big returns in 2023…

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Westpac Banking Corp (ASX: WBC) shares have been on fire over the last six months.

As you can see below, the banking giant's shares are up almost 18% during this time.

Created with Highcharts 11.4.3Westpac Banking Corporation PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

The good news is that analysts at Goldman Sachs don't believe it is too late to invest.

In fact, the broker sees big gains and big yields for Westpac shareholders in 2023 and beyond.

Broker tips Westpac shares as a buy

According to the note, the broker has a conviction buy rating and $27.60 price target on the bank's shares.

Based on the current Westpac share price of $23.44, this implies potential upside of almost 18% for investors.

Goldman Sachs revealed four key reasons for its bullish view on Australia's oldest bank. It explained:

We are Buy-rated (on CL) and continue to see WBC as our preferred exposure to the A&NZ Financials reflecting: i) its strong leverage to rising rates, ii) despite WBC revising its FY24E cost target to A$8.6 bn (from A$8.0 bn), the bank's performance on cost management remains strong in this inflationary environment with a 9% step down in costs expected over the next two years, iii) the business is still investing effectively in its franchise, and iv) we note the stock is trading at a notable discount to peers, versus the historical average discount of 2%.

Increasing dividends

But it gets better. Goldman is expecting Westpac to increase its fully franked dividend each year through to FY 2025.

For example, in FY 2023, the broker is expecting an increase to $1.48 per share. This represents a 6.3% dividend yield for investors based on where Westpac shares are currently trading.

After which, the broker expects the bank to lift its dividend to $1.59 per share in FY 2024 and $1.69 per share in FY 2025.

This will mean very attractive yields of 6.8% and 7.2%, respectively, for those two financial years.

Motley Fool contributor James Mickleboro has positions in Westpac Banking. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking. 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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