With the ASX 200 index being somewhat rangebound, and with the RBA likely to keep interest rates around these low levels for the foreseeable future, dividend shares are looking attractive in today’s share market.
I’m on record as being bearish on the big four banks, seeing as they are facing headwinds on multiple fronts, the biggest being falling house prices and the risk of rising bad debts.
Yet the big four banks have a very strong competitive advantage. They have a high level of recurring revenue. For all the unsavoury revelations coming out of the banking royal commission, they still have a high level of customer loyalty and retention.
All that is revealed in their profitability, and particularly in bank dividends. Although dividends aren’t rising, they are stable, and offer investors a very attractive fully franked dividend yield.
In its most recent results, Commonwealth Bank of Australia (ASX:CBA) reported full year underlying cash profit growth of 3.7 per cent to just over $10 billion.
CBA raised its final dividend by 1 cent to $2.31, bringing the full year dividend to $4.31, up 2 cents over the previous year.
These were strong results, pushing the CBA share price up to almost $75.
Yet, in the last month, CBA shares have fallen back to trade at close to $71, although they are trading ex the final dividend, due to be paid to eligible CBA shareholders on September 28, 2018.
At around $71, Commonwealth Bank shares are currently trading on a fully franked dividend yield of 6.1 per cent, or 8.7 per cent when grossed up for franking credits.
The BHP Billiton (ASX:BHP) share price has struggled in recent times, hit by some profit taking and by trade war fears.
In August BHP reported profits jumped 33 per cent higher. The mining giant increased its full year dividend by 42 per cent to $1.59.
Looking ahead, BHP is guiding to flat volumes, lower free cashflow and increased capital expenditure. Given the outlook, and ongoing trade war fears, BHP shares could be rangebound for a period, trading between a range of between $30 and $33.
In other words, don’t expect too much in the way of capital appreciation.
More than ever, BHP shares are looking more like a dividend play, trading on a fully franked dividend yield of just over 5.1 per cent, or 7.3 per cent when grossed up for franking credits.
Neither CBA shares nor BHP shares are likely to set the world on fire, but as blue chip shares trading on attractive fully franked dividend yields, they offer income investors — including SMSFs — the opportunity to earn good tax effective income.