When you see an ASX dividend stock paying out an 11.4% yield, what do you think?
Here at The Motley Fool, we hope that you would tread very cautiously and do your research on such a stock.
If yields start heading into double-digits, it's best to do a quick "Is it too good to be true?" test.
That's because such a high return could be the result of a rapidly falling stock price, or a distribution of one-off riches.
Well, Whitehaven Coal Ltd (ASX: WHC) is in such a position at the moment.
It is pumping out an alluring 11.4% fully franked dividend yield, and was the darling of the market last year as the world faced an energy crisis.
This year so far, the coal mining stock has fallen close to 27%.
So should you pounce on it now or is it a value trap?
Image source: Getty Images
Why is the market nervous?
The dilemma was posed to Shaw and Partners portfolio manager James Gerrish recently.
The worry for potential investors is speculation that the federal government could bring in extra taxes on the coal and gas industry.
Gerrish acknowledged the situation has the market on tenterhooks.
"The short-term issue is Whitehaven Coal have suspended their buyback," he said in a Market Matters Q&A.
There is also another corporate move that the market is anxious about.
"Although they are still paying a healthy 42 cent fully franked dividend on Monday the implication is they are… likely to buy BHP Group Ltd (ASX: BHP)'s coal assets.
"Unlike many, at Market Matters we regard this as a positive assuming they don't pay too much."
Risks could be overstated
His team believes that coal has more legs left in it yet.
"We continue to believe that fossil fuels have a major role to play as the transition to a clean energy world is likely to prove harder/longer than many believe," said Gerrish.
"Hence we are considering increasing our exposure into current weakness."
And what about those potential levies on dirty energy sources?
"Future government taxes are always a risk but [it's] unlikely to be too onerous if the country needs the fuel."
Quite a few of Gerrish's peers agree.
According to CMC Markets, seven out of 13 analysts currently rate Whitehaven Coal as a buy.
