Should I buy this ASX dividend share for its 26% yield?

I take a closer look into a company offering a yield that is almost too good to ignore.

| More on:
Woman on her laptop thinking to herself.

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

Cash in the bank is now earning more than 5% interest, but it's still a world away from what one ASX dividend share is offering.

At a dividend yield of 26%, Yancoal Australia Ltd (ASX: YAL) looks too good to be true. The coal mining company paid out a motza to its shareholders as coal prices exploded in 2022. In the space of a year, prices for the commodity tripled.

However, with prices now plummeting back to reality, would it still be wise to seek passive income from this company?

What could future payments look like?

While the 26% figure might attract dividend investors to Yancoal like moths to a flame, it is important to remember this is a lagging indicator. What investors can expect to get paid in the future will depend on forward earnings.

Realistically, the dividend income provided by Yancoal will be heavily dependent on the direction of coal prices in the coming years. According to KPMG forecasts, both metallurgical and thermal coal prices are expected to trend downwards, as pictured below.

Source: Coal price and FX market forecasts, KPMG.

Based on these estimates, metallurgical coal could reach US$120 per tonne in 2026. Meanwhile, thermal coal could decline to as low as roughly US$90 per tonne in 2027.

Looking at past operating margins and earnings, it appears Yancoal is able to generate profits as long as the average coal price remains above approximately US$80 per tonne (adjusting for inflation).

This would align with positive earnings anticipated in 2023 and 2024, according to the consensus numbers provided by Commsec.

So, what could this mean for future dividends from this ASX share?

Assuming the coal miner pays out between 40% to 50% of those profits as dividends, a considerable yield might still be on offer. Consensus estimates for the next three years suggest yields above 10% on today's share price.

Why I'm not sold on this ASX dividend share

Despite Yancoal trading on a price-to-earnings (P/E) ratio of 1.6 and a trailing yield of 26%, I'll probably steer clear of this one personally.

This might seem crazy given how ridiculously cheap it looks at face value. The problem I have with Yancoal, and all other coal mining shares, is its use might now be in structural decline.

I'm not going to assert that coal is definitely dead and gone for good. And, who knows, perhaps China keeps on consuming our coal for many decades to come. Though, unlike a great product or a service, it's hard for me to know whether dividends will sustainably grow in the future for this ASX share.

Instead, I'd rather pay a fair price for a wonderful company than a wonderful price for a fair company.

Motley Fool contributor Mitchell Lawler 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 Opinions

Happy miner giving ok sign in front of a mine.
Opinions

Which ASX 200 stock offers 'material upside' amid continuing uncertainty over US tariffs?

Blackwattle Investment has identified one ASX 200 large-cap stock that is thriving on the uncertainty.

Read more »

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

2 rising ASX financial shares with 'meaningful upside' still left: fundie

Financials outperformed every other sector in FY25, but there are still buying opportunities left, say these experts.

Read more »

A businessman hugs his computer and smiles.
Opinions

If I could only own one ASX 200 share for the rest of my life, it'd be this one

This is one stock I expect to own forever.

Read more »

Man ponders a receipt as he looks at his laptop.
Technology Shares

Brokers rerate 3 leading ASX 200 tech stocks

Experts reveal their ratings on the ASX 200 tech sector's three biggest companies.

Read more »

Person holding a blue chip.
Opinions

Buy alert! 2 ASX 200 blue-chip shares worth a look now: expert

Dylan Evans from Catapult Wealth has identified two blue-chip shares that he thinks are good buys today.

Read more »

Two happy woman on a couch looking at a tablet.
Opinions

Why I'm excited to see the results of these ASX 200 shares

These stocks could reveal very interesting insights.

Read more »

Young male investor smiling looking at laptop as the share price of ASX ETF CRYP goes higher today
Opinions

Why I just bought this 5.2%-yielding ASX dividend stock and plan to buy even more

This business is one of my favourites for dividends and total returns.

Read more »

A young female investor with brown curly hair and wearing a yellow top and glasses sits at her desk using her calculator to work out how much her ASX dividend shares will pay this year
Opinions

Why I'm still investing in ASX shares during tariff uncertainty

There are a few reasons why I plan to continue investing even during uncertainty.

Read more »