Could now be the time for income investors to buy CBA shares?

As an ASX big four bank, Commonwealth Bank of Australia (ASX: CBA) shares have always been a prominent choice for ASX dividend income investors.

CBA shares have paid out hefty dividends for decades. But does that mean it is a good choice for income investors today?

Well, let’s start with the dividends CBA is currently paying out. So Commonwealth Bank shares have doled out two dividends this year, as is the norm.

The first was the March interim dividend of $1.75 per share, fully franked.

The second was the final dividend from September, which was worth $2.10 per share, also fully franked.

That’s a total of $3.85 in dividend income per share for 2022. On today’s CBA share price of $108.10 (at the time of writing), this gives CBA shares a trailing dividend yield of 3.56%.

Are CBA shares a buy for dividend income?

But let’s talk about what might happen going forward from here. After all, knowing what kind of income CBA has paid out only goes so far in terms of what is useful for an investor today.

So, like many ASX dividend shares, CBA has a dividend policy. This tells investors that each year, CBA will strive to “target a full-year payout ratio of 70% – 80%” of its earnings to fund its dividends.

Over FY2022, CBA made $5.57 in earnings per share (EPS), up 14% from the $4.88 it made in FY2021. Of that $5.57 in EPS, the bank paid out $3.85 of those earnings per share as dividends. That’s a payout ratio of 69.12%, so just below CBA’s ratio target.

Both of these metrics bode well for future dividend income. If CBA can manage to grow its EPS again in FY2023, and keep its payout ratio steady, then shareholders will enjoy a dividend increase. If the bank grows its EPS and ups its payout ratio, then investors will enjoy an even larger dividend rise.

Perhaps this is why brokers at Macquarie have recently decided to swap out Australian and New Zealand Banking Group Ltd (ASX: ANZ) shares for CBA shares in a recent model portfolio reshuffling.

So on the numbers, it looks as though CBA’s current dividends are on a sure footing and could increase further. But we shall have to wait and see if CBA can keep up its earnings growth going forward. That’s the real key to a rising dividend.

The post Could now be the time for income investors to buy CBA shares? appeared first on The Motley Fool Australia.

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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 recommended Macquarie Group Limited. 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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