Does It Make Sense To Buy National Australia Bank Limited (ASX:NAB) For Its Yield?

Today we'll take a closer look at National Australia Bank Limited (ASX:NAB) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

A 2.4% yield is nothing to get excited about, but investors probably think the long payment history suggests National Australia Bank has some staying power. Some simple research can reduce the risk of buying National Australia Bank for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on National Australia Bank!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. National Australia Bank paid out 53% of its profit as dividends, over the trailing twelve month period. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Consider getting our latest analysis on National Australia Bank's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of National Australia Bank's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was AU$1.5 in 2011, compared to AU$0.6 last year. The dividend has shrunk at around 8.6% a year during that period. National Australia Bank's dividend has been cut sharply at least once, so it hasn't fallen by 8.6% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a 10-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. National Australia Bank's earnings per share have shrunk at 16% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and National Australia Bank's earnings per share, which support the dividend, have been anything but stable.

We'd also point out that National Australia Bank issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

Conclusion

To summarise, shareholders should always check that National Australia Bank's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. National Australia Bank's payout ratio is within an average range for most market participants. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. To conclude, we've spotted a couple of potential concerns with National Australia Bank that may make it less than ideal candidate for dividend investors.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 3 warning signs for National Australia Bank that investors should know about before committing capital to this stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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