Almost 7% yield: Can Westpac shares keep up the extraordinary dividend income?

This major ASX bank has a trailing dividend yield of almost 7% right now.

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Key points

  • As an ASX 200 bank share, Westpac would be expected to offer investors a fat, fully-franked dividend yield
  • But this ASX bank share has a yield of nearly 7% on the table
  • Westpac's dividend payout ratio shows this yield could be sustainable going forward -- if all goes well, of course

Looking at Westpac Banking Corp (ASX: WBC) shares, you'll probably notice one thing before anything else: the dividend yield on display. Sure, as an ASX 200 bank share, it's not unusual for Westpac to sport a dividend yield that catches the eye. But as of Monday's close, Westpac had a monstrous yield of 6.34%.

It is, indeed, at the upper end of what most ASX dividend shares offer in terms of income right now. Especially when considering Westpac's dividends usually come with full franking credits attached (grossing this current yield up to around 9%).

But if you buy Westpac shares today, are you guaranteed to receive this near-7% yield? Or is this extraordinary potential dividend income on offer an illusion?

Well, no dividends or dividend yields on the ASX are guaranteed. So we have no way of knowing whether this trailing dividend yield offered by Westpac today represents what new investors might receive if they rush out and buy Westpac shares right now.

However, there is one metric we can look to for insight into how sustainable the Westpac dividend is at its current level. That would be the bank's dividend payout ratio.

All dividend shares have this metric. It represents what proportion of a company's earnings per share (EPS) it is paying out as dividends. If a company's payout ratio is at 30%, it indicates there is a lot of room to grow its dividend into the future. Conversely, if a company has a 99% payout ratio, it is a red flag that the dividend tank is running on empty.

So what is Westpac's current payout ratio?

Can Westpac shares keep up their hefty dividends?

In the bank's half-year results for the first half of FY2023 that we saw back in May, Westpac revealed that over the half, it made $1.14 in earnings per share. Of that $1.14, it paid out a 70 cents per share dividend. That gives Westpac a payout ratio of 61.4%.

Over the entirety of FY2022, Westpac earned $1.48 in EPS while paying out $1.25 per share in dividends. That was a payout ratio of 84.46%.

Both of those numbers might seem high (especially the latter). But they are conventional figures for an ASX bank, particularly one as large and mature as Westpac.

Let's look at Westpac's competitor, Commonwealth Bank of Australia (ASX: CBA), to see how it compares.

For the first half of FY2023, CBA revealed a payout ratio of 69.08%, based on the $3.04 in EPS and $2.10 in dividends per share. For FY2022, it was 69.12%, with $5.57 in EPS and $3.85 in dividends per share.

National Australia Bank Ltd (ASX: NAB) had similar metrics for its own half-yearly report last month. NAB forked out 64.1% of its earnings as dividends over the half. For FY2022 as a whole, it had a payout ratio of 68.4%.

Westpac's payout ratio for FY2022 looks a little higher than that of NAB and CBA. But its half-yearly ratio was lower than these other big four banks.

So with that, we can probably conclude that Westpac's finances are in a healthy state, and the bank should have no problem at least maintaining its dividends at their current levels over the next 12 months, barring a major financial event, of course.

Motley Fool contributor Sebastian Bowen has positions in National Australia Bank. 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 no position in any of the stocks mentioned. 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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