Are big ASX banks like NAB (ASX: NAB) and ANZ (ASX: ANZ) dividend yield traps?
What’s going on with the banks?
When share prices fall it boosts the trailing dividend yield. COVID-19 has caused some of the big four bank share prices to drop by around 40%. This has made the trailing bank dividends look very high and attractive.
NAB has a trailing fully franked dividend yield of 10.4%.
ANZ has a partially franked dividend yield of 9.9%.
Imagine just receiving those dividends year after year. That would be the historical share market return just in dividends.
But sometimes high dividend yields can be traps. Just because a share has paid a dividend of $X over the past year doesn’t mean it’s going to pay the same dividend in 2020.
Why ASX banks may have to cut dividends
There are plenty of reasons why the big banks may have to heavily cut dividends.
For starters, the economic impacts of COVID-19 are predicted to be similar to the GFC (if not even worse) with how many industries have simply shut down.
The Reserve Bank of New Zealand (RBNZ) has banned NZ bank dividends, which means the subsidiaries can’t pass on dividends to the Australian HQ.
APRA has said it expects the banks to materially reduce dividends. NAB and Westpac (ASX: WBC) have both outlined profit hits of over $1 billion in their upcoming results.
There is a high risk of bad debts with mortgages, credit cards and personal loans for the banks with so many jobs being lost.
I wouldn’t buy the banks for dividends. I think they’re yield traps, for the shorter term at least. I’d focus on high quality growth shares like these technology shares instead:
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Disclosure: at the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.
