Do these ASX dividend shares really have 20%+ yields?

Are these yields too good to be true?

| More on:
A man throws his arms up in happy celebration as a shower of money rains down on him.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Australian share market is home to a good number of dividend shares with generous yields.

However, as dividend yields are usually reported on a trailing basis, investors need to be careful that they don't buy shares on the expectation that the last dividend is indicative of what will be paid over the next 12 months.

For example, the three ASX shares listed below show up on many websites as offering 20%+ yields. Is this really the case?

Fortescue Metals Group Limited (ASX: FMG)

On Google, Fortescue shows up with a fully franked 25% dividend yield. While this is accurate based on its FY 2021 dividends, analysts are tipping the iron ore giant to pay a significantly reduced dividend in FY 2022. This is due to a sizeable pullback in the iron ore price and the weaker outlook for the low grade iron ore that Fortescue mines. Goldman Sachs is expecting fully franked dividends per share of US$1.02 in FY 2022 and 61 US cents in FY 2023. This will mean yields of 9.7% and 5.8%, respectively, over the next two financial years. Great yields, but nowhere near the 25% some investors may have been hoping for.

iShares S&P 500 AUD Hedged ETF (ASX: IHVV)

This index-tracking exchange traded fund apparently offers investors a 21% yield at current prices. However, this is even more misleading than the previous example. As my colleague explains in detail here, this ETF periodically rebalances its holdings. This is achieved by selling the shares that have increased outside their index allocations and by buying the shares that go under. This left the iShares S&P 500 AUD Hedged ETF with surplus cash, which is then returned to existing unit holders in the form of dividend distributions. The actual dividend yield provided by this ETF is closer to 1.3%.

Regal Investment Fund (ASX: RF1)

Finally, Regal Investment Fund's shares show up as offering a 25% yield at current prices. However, it is worth noting that this dividend yield is the result of a profit surge in FY 2021 after the fund delivered a whopping return of 62.75% net of fees. This allowed the company to make a significant increase to its full year dividend. However, it is impossible to know if Regal Investment Fund will be able to come close to replicating its success again in FY 2022. As a result, if its dividend were to drop back down to the FY 2020 level of ~23 cents per share, it would mean a yield of 6.8% rather than a 25% yield.

Motley Fool contributor James Mickleboro 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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Dividend Investing

Hand holding Australian dollar (AUD) bills, symbolising ex dividend day. Passive income.
Opinions

2 ASX dividend shares I'd buy after the stock market sell-off

Both of these income stocks offer appealing dividend yields.

Read more »

Man holding out Australian dollar notes, symbolising dividends.
Dividend Investing

2 outstanding ASX dividend stocks down 30% I'd buy right now

Analysts think these income stocks are cheap buys after falling heavily.

Read more »

Person holding Australian dollar notes, symbolising dividends.
Dividend Investing

How I would build a $1,000 monthly passive income stream with ASX shares

It isn't as hard as you might think to build a sizeable passive income.

Read more »

Middle age caucasian man smiling confident drinking coffee at home.
Dividend Investing

3 undervalued ASX dividend stocks paying a remarkable 6%+

Analysts are expecting big payouts from these shares.

Read more »

An ASX investor in a business shirt and tie looks at his computer screen and scratches his head with one hand wondering if he should buy ASX shares yet
Dividend Investing

Where are my dividends? A small error costing shareholders big dollars

There’s millions of dollars in unclaimed funds floating around. Does some of it belong to you?

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Dividend Investing

1 marvellous ASX dividend stock down 33% to buy and hold immediately

Analysts think this stock could be a great pick for income investors.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Dividend Investing

Dividend reinvestment plans deliver big discounts on Wisetech, Bendigo Bank, and Woolworths shares

Wisetech, Bendigo Bank, and Woolworths have announced their dividend reinvestment plan share prices.

Read more »

Happy man holding Australian dollar notes, representing dividends.
Dividend Investing

How to earn $50,000 of passive income from ASX shares

The share market can be used by investors to generate significant income. Here's how.

Read more »