BHP Billiton Limited (ASX: BHP) is Australia's largest mining corporation, yet it is also considered by many investors to be a top dividend-paying stock.
In the 2014 financial year, BHP Billiton distributed US$1.21 per share in dividends while it should pay a minimum of US$1.24 this financial year (given that it increased its interim dividend by 3 cents). In Australian dollars, that equates to $1.67 per share, which would put the stock on a monster 6.3% dividend yield at today's price of $26.41 per share.
Indeed, BHP Billiton has what is known as a 'progressive dividend policy' which means that the company seeks to increase, or at very least maintain, its dividend in US dollar terms at every half-year payment.
The fact that the dividend is declared in terms of US dollars is even more advantageous for Australian investors thanks to the Australian dollar's sharp fall over the last two years.
However, relying on a resources company for dividends can be a dangerous strategy to boost your income. As long-term shareholders will know only too well, BHP Billiton's share price has collapsed under the mounting pressure caused by falling commodity prices, particularly in the iron ore and petroleum markets.
BHP's shares have lost more than 30% over the last five years, compared to a 30% increase for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). BHP's dividend yield might have seemed attractive during that time, but it was by no means enough to make up for the stock's sharp decline.
The problem is, China is experiencing a major slowdown which will continue to be reflected in the price of commodities. That is especially the case for iron ore which recently hit a fresh low of just US$44 a tonne (with further falls expected before the end of the year).
Not only could this apply even further pressure to BHP's struggling share price, it could also compromise BHP Billiton's ability to maintain its progressive dividend policy without being forced to sell assets or take out more debt.
Should you buy BHP Billiton?
BHP Billiton is arguably in a better position than any of its rivals to weather the commodities storm. While it maintains far lower operating costs than miners such as Fortescue Metals Group Limited (ASX: FMG) or BC Iron Limited (ASX: BCI), it is also more diversified than Rio Tinto Limited (ASX: RIO).
However, not even BHP Billiton can avoid the damage that will be caused by falling commodity prices. Lower prices will impact BHP's margins as well as its overall profits and cash flows, which could seriously hinder its ability to maintain dividends.
Although it is deserving of a position on your long-term watchlist, investors should certainly not rely on BHP Billiton for its dividend payments, nor should they expect its shares to surge in price anytime soon. Rather than taking an unnecessarily high level of risk on BHP Billiton, investors would be wise to explore other high-yielding opportunities instead.
