Is CBA (ASX:CBA) the best ASX bank share to buy for dividends?

Is CBA (ASX: CBA) the best ASX bank share to buy for dividends? There are plenty of banks to choose from, but which should dividend investors go for?

What is CBA?

Commonwealth Bank is Australia’s largest bank, with commanding market share of mortgages (24%), credit cards (27%) and personal lending markets. It has 16.1 million customers, 14.1 million are in Australia. It is entrenched in the Australian payments ecosystem and financial marketplace.

How does the CBA dividend stack up?

ASX bank shares are known for their dividends. It’s partly why so many investors are drawn to them, particularly when you add in the bonus of franking credits.

Getting a 5% fully franked dividend yield translates to yield of around 7.1% including those franking credits.

But it can be a yield trap to just go for the highest dividend yield you can see. We have already seen banks like NAB (ASX: NAB) cut the dividend. The HY20 dividend saw a heavy reduction due to COVID-19, but NAB had reduced its bi-annual dividend to $0.83 per share in FY19 from $0.99 per share in FY18 and a few previous years.

Prior to COVID-19, CBA was the only large bank that hadn’t given its shareholders an income cut recently. Westpac (ASX: WBC) had also cut the dividend, whilst ANZ (ASX: ANZ) had reduced its franking percentage, which effectively reduces income (after tax) to shareholders.

CBA is seen as a higher quality bank. Coming into this COVID-19 period it had a stronger balance sheet with more capital, a higher CET1 ratio. You never know when the next crisis is going to hit, so it’s a good idea to have good reserves. Think of it like an emergency fund for the bank. Normally big issues like the GFC or COVID-19 only impact the economy for a year or two.

The last 12 months of CBA dividends amounts to $4.31 per share. The biggest bank was able to pay out its full HY20 dividend before COVID-19 really got going.

I think it’s very likely that CBA will reduce its final FY20 dividend compared to FY19. The final FY19 dividend was $2.31. I think CBA will pay something, but it’s probably going to be a large cut to the tune of something like 33% to 66%. So I’m thinking the dividend will be somewhere in the range of $0.75 to $1.50 per share.

CBA dividend estimate

CommSec has an (external) annual dividend estimate of $3 per share for CBA in FY21. I’d agree with that, considering I think the final FY20 dividend could be $1.50 per share. CBA shares would offer a grossed up yield of 6% at today’s price. Not bad at all.

I’d go for CBA over ANZ, Westpac and NAB. But there are plenty of other dividend shares that could be better. For starters, Macquarie (ASX: MQG) could deliver better growth with its multi-division global approach. Or Vanguard Australian Shares Index ETF (ASX: VAS) could be better for diversification.

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