It's pretty rare that a company offers a fully franked dividend yield above 8%.
It's even rarer when that company happens to be one of the most widely held stocks in Australia.
The yield on Commonwealth Bank of Australia (ASX: CBA), for instance, maxed out at around 7% during 2011.
At a time where interest rates were sitting above 3%, investors couldn't resist the dividends on offer, bidding the bank's share price higher.
That's what happens when interest rates fall. The lower returns from term deposits and government bonds attract investors to high-yield dividend stocks, despite their additional risks.
Considering Commonwealth Bank's shares were offering roughly twice the yield as the average term deposit at the time, it's easy to see why…
Interest rates have fallen even further in the time since. They're now sitting at a record low of 2% with some pundits suggesting they'll fall even further in the next 12 months.
So how then is it possible that investors would let a company like BHP Billiton Limited (ASX: BHP) trade on an 8.6% fully franked dividend yield?
Grossed up, that amounts to a 12.3% yield which is almost unheard of for any company, much less a blue chip as widely followed as BHP Billiton.
Indeed, one look at BHP's 12-month share price chart shows that something is amiss.
Source: ASX website
The miner's shares have plummeted more than 36% in that time. They've fallen from $30.80 to just $19.65 today — their lowest price in seven years — making it one of the worst performing companies from the S&P/ASX 200 (ASX: XJO).
The fall in BHP Billiton's share price has been largely justifiable.
Just as the miner enjoyed rising commodity prices during the boom years, it is now suffering through crashing prices with iron ore and oil – BHP's two most important commodities – hit particularly hard.
BHP Billiton was also forced into hefty impairments during the latest financial year resulting in a stunning 86.2% decline in net profit for the period.
Believe it or not, it gets worse…
Commodity prices have slipped further since then and a recent disaster at Samarco, Brazil, threatens to see further contraction in earnings this year.
Then, to come around full-circle, there's the issue with BHP Billiton's dividend…
You see, many investors fall into the trap of seeing a stock's dividend yield and taking it at face value, assuming that company can maintain those payments.
But history is littered with instances where that simply has not been the case.
Take Pacific Brands Limited (ASX: PBG) as a perfect example. The company, which owns brands such as Bonds and Sheridan, ended 2008 with a tasty 10.5% dividend yield, only to pay shareholders nothing in the following year.
It reintroduced its dividend policy in 2011, only to reduce those payments in the subsequent periods.
Metcash Limited (ASX: MTS), the wholesale distributor for IGA stores, is another example.
The company offered a monstrous dividend yield, only to scrap it when competition got too tough with rivals Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES).
The point is, dividend payments are not guaranteed and often, it's the companies offering huge yields that are the ones unlikely to sustain them.
Why? Often because the yields are high due to the shares being sold off, which occurs when investors lack confidence in the company's future.
Returning back to BHP Billiton, the miner is facing some very strong headwinds right now which could hinder its ability to continue increasing dividends every six months.
Falling commodity prices will crimp earnings growth and cash flow from operations, possibly forcing BHP to either sell assets or raise debt to fund the distributions.
Both options would compromise the strength of the miner's balance sheet or threaten its credit rating, both of which management have clearly stated are top priorities for the company's future.
Of course, there are those who suggest otherwise, including veteran mining reporter Trevor Sykes who thinks BHP Billiton is a "red hot buy" right now, according to The Australian Financial Review.
But the general belief is that BHP does not have what it takes to maintain its 'progressive dividend' policy.
The Fairfax press reported yesterday, for instance, that UBS analyst Glyn Lawcock thinks a reduction in shareholder payouts is almost inevitable if commodity prices continue to crash.
Foolish Takeaway
All things considered, BHP Billiton doesn't seem like a great investment today. Sure, the shares could rise from here, but there's a lot of risk involved as well.
Of course, that doesn't mean that BHP Billiton will never be a decent buy. There could well come a time where the outlook for commodity prices becomes more positive, or when BHP's shares become simply too cheap to ignore.
But for right now, it seems there are too many other great opportunities out there to choose from instead.
In fact, Andrew Page, lead advisor for Motley Fool Dividend Investor, recently introduced members to his Best Buys Now — one of which offers an unbelievable 8.2% dividend yield.
Better yet, its shares are trading at a considerable discount to their 52-week high and offer plenty of growth potential as well.
Indeed, for investors who are prepared to look beyond the nation's blue chip stocks and venture outside the top 100 ASX companies, there are plenty of quality, low risk companies that continue to offer great value and attractive yields.
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