An ASX 200 dividend heavyweight I’d buy over CBA shares right now

Two laughing male executives wearing dark suits chat across a timber lunch room table while one of them holds up his phone to show information.

Two laughing male executives wearing dark suits chat across a timber lunch room table while one of them holds up his phone to show information.

Commonwealth Bank of Australia (ASX: CBA) shares are a popular way to generate dividend income. But, I think there are better S&P/ASX 200 Index (ASX: XJO) dividend shares to consider, like Telstra Group Ltd (ASX: TLS) shares.

CBA is one of the best banks in Australia. However, it is not immune to the impacts of competition.

For a long time, I’ve thought that lenders essentially offer a commoditised product – there are loads of lenders for borrowers to choose from. Each of them can offer a loan. A lower interest rate on that loan could win a borrower, but it lowers profitability.

If numerous lenders are offering large cash backs or cheaper interest rates, then banks have to compete if they want to retain and win customers.

This dynamic is apparently happening in the Australian loan market right now. The CBA boss confirmed that in his comments after delivering the CBA’s half-year result.

While the short-term profits of CBA are up, I’m not sure how the next 12 months and beyond will develop. Lending margins may not go up as much as previously expected, while it seems almost inevitable to me that arrears and bad debts are going to increase from the very low-level today after all of the interest rate rises.

Hence, there are better ASX 200 share options for dividends in my opinion, such as Telstra.

Growth has returned

In the FY23 half-year result, it reported that total income went up 6.4% to $11.6 billion, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) climbed 11.4% to $3.9 billion and earnings per share (EPS) soared 27.1% to 7.5 cents.

The profit growth enabled interim dividend growth of 6.3% to 8.5 cents per share.

While CBA also reported profit growth, I think Telstra has a much stronger market position in Australia. Telstra says that it has the largest 5G network, with its 5G population coverage reaching over 81% of the population and it’s “on track” for its FY23 target of 85%.

The ASX 200 dividend share said that it’s currently leading the majority of key mobile and fixed network surveys for coverage and speed.

I like Telstra’s future

I think this strength bodes very well for the future. For starters, Telstra has felt empowered to increase mobile prices in line with inflation. That provides a very useful organic boost to revenue.

Telstra experienced a 4.5% increase in mobile postpaid handheld average revenue per user (ARPU) in the first half of FY23.

I’m also excited about what 5G could mean in the longer term. Telstra has lost a lot of margin and earnings from the shift to the NBN. But, if Telstra is able to offer households a 5G-powered wireless home internet option that’s similar, or better, than the NBN connection then it could lead to a much higher margin on that household for Telstra.

Telstra is expecting solid EPS growth in the next few years, which could fund more dividend growth for the ASX 200 dividend share.

Commsec numbers suggest that Telstra could be paying an annual dividend per share of 19 cents by FY25. That would be a grossed-up dividend yield of 6.7%.

Telstra share price snapshot

Since the start of 2023, Telstra shares have risen 2%.

The post An ASX 200 dividend heavyweight I’d buy over CBA shares right now appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison 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 positions in and has recommended Telstra Group. 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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