Are Fortescue shares a buy for income or are they a dividend trap?

Are Fortescue shares a 15.5% dividend trap right now?

| More on:
A man wearing glasses and a purple vest holds his hand to his chin and wonders

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

Key points

  • Fortescue shares seemingly have a dividend yield of 15.5% on the table today
  • A market expert explains how dividend traps work 
  • Fortescue shares are going for $19.17 each, up a healthy 1.11% so far this Tuesday

When one looks at the current Fortescue Metals Group Limited (ASX: FMG) share price, one metric might immediately jump out. That would be this iron ore miner's stupendous trailing dividend yield. Today, Fortescue shares are going for $19.17 each, up a healthy 1.11% so far this Tuesday.

At this share price, Fortescue's trailing dividend yield comes in at an eye-catching 15.5%. If we consider that this trailing dividend yield is also fully franked, we must also consider that this yield grosses up to an even more ludicrous 22.14% if we include the value of this franking.

So is this really what investors can expect if they purchase Fortescue shares today? Does this make Fortescue a buy today for dividend income, or is this just a big dividend trap honeypot?

A dividend trap refers to a situation where an ASX share has a seemingly attractive trailing dividend yield. But when an investor buys the shares expecting big income, they are disappointed when the company turns around and cuts its dividend, essentially 'trapping' the investor.

So is this the case with Fortescue today?

Well, let's see what one ASX expert reckons. Michael Maughan is head of the Tyndall Australian Share Income Fund. He recently shared his views on Fortescue with Livewire.

So Maughan acknowledges that "the miners have been the biggest part of the dividend pie over the last few years" on the ASX.

He notes that the current iron ore price is lower than it has been in 2022 today, but is still very high when compared to its long-term average pricing. As such, he stated that, "We expect the iron ore miners to be good cash flow generators and big payers going forward".

But does this mean Fortescue's mid-teens dividend yield is here to stay?

Are Fortescue shares a dividend trap today?

Well, not so fast, says Maughan. Here's how he described Fortescue's future dividend prospects:

There are two types of dividend traps. There's the cyclical aspect and there's the structural aspect. The cyclical aspect is you have companies that are going through cycles, the miners are a classic example. In times when the iron ore price is high, and in times when it's lower.

If you were to value that company on last year's earnings, when the iron ore price was US$220, that might not be the best benchmark to use upon which to value the company. And that came to bite. If you go back to a period like 2016 for the miners, that's a classic example of that.

…Fortescue falls into that same bucket with miners. Yes, I would definitely not use last year's yield as a way to value the company, because a yield in the high-teens is obviously too high. So if the market we're using that yield, then the stock would be much higher.

So investors definitely shouldn't count on Fortescue's trailing dividend yield as a reason to go out and buy more Fortescue shares today, according to Maughan.

But that doesn't mean Fortescue is a dud investment by any means. Chances are the miner will continue to pay out healthy dividends as long as the iron ore price remains historically elevated.

But a 15.5% yield going forward? That might be a bridge too far.

Should you invest $1,000 in Fortescue Metals Group right now?

Before you buy Fortescue Metals Group shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Fortescue Metals Group wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 6 March 2025

Motley Fool contributor Sebastian Bowen 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 Scott Phillips.

More on Resources Shares

A white EV car and an electric vehicle pump with green highlighted swirls representing ASX lithium shares
Resources Shares

Is the lithium price set to rise?

The past few years have been a bit grim for the ASX’s lithium shares. But things look set to change.

Read more »

Female miner standing next to a haul truck in a large mining operation.
Resources Shares

Australia's iron ore export earnings to slide, Government report warns

The future may no be so bright for Australia’s iron ore miners.

Read more »

Miner looking at a tablet.
Resources Shares

What happened with the BHP share price in March?

How did the BHP share price perform amid the March market sell-off?

Read more »

A female miner wearing a high vis vest and hard hard smiles and holds a clipboard while inspecting a mine site with a colleague.
Resources Shares

3 reasons why the Rio Tinto share price could be a buy

Let’s dig into why I like this ASX mining share.

Read more »

Image of young successful engineer, with blueprints, notepad and digital tablet, observing the project implementation on construction site and in mine.
Resources Shares

3 things about BHP stock every smart investor knows

There’s a lot more to BHP than just being an iron ore miner.

Read more »

Business people standing at a mine site smiling.
Resources Shares

Here's the latest earnings forecast out to 2029 for Rio Tinto shares

Here’s how much profit Rio Tinto could make in the next few years.

Read more »

Four happy team members working together in a warehouse.
Resources Shares

Why today is great day to own BHP shares

The mining giant's shareholders have reasons to smile on Thursday.

Read more »

A smiling miner wearing a high vis vest and yellow hardhat does the thumbs up in front of an open pit copper mine.
Resources Shares

ASX 200 copper stocks jump as the red metal smashes new records

ASX 200 copper stocks are in the spotlight as global copper markets go off the scale.

Read more »