Why I think the 6% dividend yield on Westpac shares is as safe as houses

Is the big bank's 6% yield too good to be true?

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As an ASX bank share, Westpac Banking Corp (ASX: WBC) has one of the best reputations on the ASX when it comes to dividend income. All four of the major ASX 200 bank shares have been paying large, fully franked dividends for decades.

So ASX investors have come to expect exactly that from their ASX bank shares.

But is that still the case today with Westpac? Let's discuss Westpac shares' current dividend yield.

Over the past 12 months, Westpac has paid out two fully franked dividend payments. The first was the final dividend from December last year,  which came to 64 cents per share. The second was June's interim dividend of 70 cents per share.

Is this ASX 200 bank really offering a fully franked 6% dividend yield today?

Both of those payments represented significant increases over what investors enjoyed for the previous year. The final dividend of 64 cents upped Westpac's previous final payment of 60 cents. This year's interim dividend of 70 cents per share easily beat 2022's interim dividend of 61 cents per share.

Today, these payments give the current Westpac share price ($21.79 at the time of writing) a trailing dividend yield of 6.16%.

Now bank dividends can bounce around a bit, as we saw during the pandemic. But I reckon the current Westpac dividend yield is about as safe as the houses it is built on.

Westpac is of course one of the largest mortgage issuers in the country, with 21% of Australia's mortgages controlled by Westpac over FY2022.

Why? Well, I always like to look at a dividend share's payout ratio. This tells us the proportion of a company's earnings are being paid out as dividends. if a company has a payout ratio of 50%, then its dividend is probably reasonably secure, as long as it doesn't suffer a catastrophic earnings drop.

But if that payout ratio is nudging 90% or more, then it is starting to look unsustainable.

In FY2022, Westpac hit a payout ratio of 83% on a cash-earnings basis, which actually came in at 67% excluding notable items.

That's looking pretty good for a mature business like Westpac, especially by ASX bank standards.

ASX experts rate Westpac shares

But it's not just me.

Just yesterday, we looked at the views of ASX broker Ord Minnett's senior investment advisor Tony Paterno. Paterno said:

We expect Westpac to increase home loans in line with the market at around 3.5% a year… Investments to automate processes and in additional staff are helping Westpac approve loans more quickly.

Based on a 70% payout ratio, WBC's recent dividend yield above 6% is attractive. If earnings prove weaker than our forecasts, the bank can also use its surplus capital to support dividends.

Earlier this week, we also discussed the views of another broker, Morgans. Morgans is currently bullish on Westpac shares and has given the bank an add rating alongside a 12-month share price target of $23.02.

When it comes to dividends, Morgans is also expecting big things. It reckons Westpac's final dividend for 2023 will come in at 76 cents per share, which will be another increase over the prior year.

It is also pencilling in $1.47 in dividends per share for the 2024 financial year, which would be yet another rise over FY2023's forecast total of $1.46 per share.

So all in all, it seems that ASX experts are on the same page when it comes to the Westpac dividend. And it's also a view that I share.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. 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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