Picking ASX shares that prove to be dividend winners is always a tricky game. As is any other kind of investing for that matter. But it's the unique metrics that dividend investors have to navigate which makes this area of investing a little more unique. All investors know upfront what kind of dividends an ASX share has paid out over the past 12 months. And, by extension, the kind of dividend yield each ASX share may possess.
But as investors should know, just because an ASX share has a high dividend yield, it doesn't mean investors can take that to the bank. A common investing mistake is to choose an ASX dividend share due to a seemingly fat yield, only to have that yield pared back. Not to mention a simultaneous share price fall to boot. This scenario is often described as a 'dividend trap'.
So let's look at some ASX shares today that seem to be offering outsized yields right now. Could any of them be a dreaded dividend trap?
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When is a high dividend yield just trap bait?
Magellan Financial Group Ltd (ASX: MFG) is one such share. Magellan has had a horrible year, losing around 66% of its value. But this has pushed up Magellan's trailing dividend yield to an eye-watering 15.57% on current pricing. The interesting thing about Magellan is that when the company reported its half-year earnings last month, it declared an interim dividend of 110.1 cents per share, which coincidentally was paid out today.
That was Magellan's highest-ever interim dividend. So why aren't investors flocking to this company's massive 15%-plus yield? Well, Magellan makes its money from its funds management business. And the company has been experiencing record fund outflows over the past few months for a number of reasons.
So it seems that investors are betting that this outflow will start to bite the company's ability to keep funding dividends at these kinds of levels. We'll have to see if this turns out to be the case, but at least one broker isn't too sure it will.
Another ASX dividend share with a 15% yield right now
Fortescue Metals Group Limited (ASX: FMG) is another ASX dividend share seemingly offering a monster dividend yield right now. On current pricing, the iron ore giant has a trailing dividend yield of close to 15.5%. That's even after the company cut its interim dividend by 41% as announced in its earnings last month. The cut was the result of Fortescue directing more capital towards its emerging Fortescue Future Industries hydrogen business.
Fortescue's profits (and dividends) are intrinsically tied to the price of iron ore itself. Last month, Fortescue announced that its average revenue per dry metric tonne over the half was US$96. But iron ore has continued to boom in recent months, and is now going for a six-month high above US$160 a tonne.
If the iron ore price continues to hold at these levels, and Fortescue can continue to extract it at relatively low costs (made harder recently by surging oil prices), we could well possibly see dividends continue to roll in at these high rates. But again, we shall have to wait and see.
