Should income hunters have their eyes on this top ASX stock offering a 12% dividend yield?

Is this stock's huge yield too good to be true?

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When a top ASX stock offers a 12% dividend yield, it's usually enough to make most investors sit up and pay attention.

A 12% yield isn't typical on the ASX. It tempts investors with the prospect of receiving $12 every year for every $100 invested. That would return an investor's entire capital back to them in dividends in just over eight years.

It also represents more than double (almost triple in fact) the return one can expect from a cash investment like a term deposit or savings account right now.

So a 12% yield is a rare sight to see on the ASX. And yet that's what the top ASX stock Fortescue Ltd (ASX: FMG) appeared to be offering investors this week.

Yesterday, Fortescue shares closed at $16.66 each. At that share price, this ASX 200 iron mining giant offered a dividend yield of 11.82%. That's going off the total of $1.97 per share in dividend payments that Fortescue investors will receive this year.

That $1.97 total comprises the $1.08 per share interim dividend paid in March and the 89 cents per share final dividend to be paid later this month.

Those dividends come (or will come) with full franking credits attached, as is typical with this top ASX stock's payouts.

This means that yield would gross up to an even more impressive 16.89%.

Of course, Fortescue shares have rocketed significantly in value this Friday. At present, this top ASX stock's shares are up a rosy 4.86% to $17.47 each, which technically reduces Fortecue's yield to 11.28%. Even so, we still have a monster yield on display here.

Is this ASX top stock's 12% yield for real?

Income hunters might want to immediately buy up shares of Fortescue, a top ASX stock pick for many dividend investors, thanks to this yield.

However, those investors should be careful. This 12% yield (or 11.2%) today is arguably something of a mirage. It represents neither the income that investors who bought Fortescue shares a year ago would have received nor the income someone who buys the shares today is certain to obtain.

It is merely a reflection of what Fortesue's 2024 dividend payments represent against the current Fortescue share price.

This stock may be one of the ASX's top iron ore miners. But, like all mining stocks, its profits, and thus dividends, are bound to the price of its major commodity. In this case, iron ore.

As such, Fortescue's dividend payouts going forward are almost entirely dependent on the price of iron ore. Iron ore is a notoriously volatile industrial commodity that tends to rise and fall with the health of the global economy. This year, prices have plunged, thanks in part to weakness in the Chinese economy.

That's probably why there is a large disparity between that March interim dividend of $1.08 per share and this month's final dividend of 89 cents.

It's also why the Fortescue share price has lost more than 40% of its value over 2024 to date.

Foolish takeaway

Many ASX shares pride themselves on delivering consistently rising dividends. But miners, even the top ASX mining stocks, are seldom part of this club due to the fickle nature of the commodities market.

As such, no one should ever buy a mining stock, even a top one, with the expectation that its current dividend yield will hold true.

Of course, Fortescue could well yield 12% from now on if iron ore prices recover over the rest of the year. But if prices start dropping again, they could also prove to yield 6%, 5%, 4%, or even less.

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.

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