Is Fortescue stock a buy for its monstrous 10% dividend yield?

We should always be careful about a high dividend yield on a mining stock.

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If you look at Fortescue Ltd (ASX: FMG) stock right now, it probably won't take you too long to notice this ASX 200 blue-chip share's dividend yield.

At the time of writing, Fortescue stock has had a bit of a nervous session this Friday and is currently down 0.7% at $18.57 a share. At this share price, the mining giant is seemingly trading on a monstrous trailing dividend yield of 10.61%.

It gets better. Fortescue usually attaches full franking credits to its dividends. So, in theory, Fortescue stock can even be described as trading with a grossed-up yield of 15.16% if we include the value of those full franking credits.

Obviously a 10.61% dividend yield (let alone a 15.16% one) is a tempting prospect for any investor. After all, getting more than 10% of your capital back every year in dividend income would make for a phenomenal cash flow investment.

But is this dividend yield too good to be true? Or is Fortescue stock a screaming buy for income right now?

Is Fortescue stock's 10% dividend yield too good to pass up?

Well, the first thing to note is that this trailing yield is no joke.

Fortescue has, as is its custom, paid two dividends over the past 12 months. The first was the $1.08 interim dividend investors bagged back in March. The second was the 89 cents per share final dividend from September. As we just alluded to, both of these payments came with full franking credits attached.

Together, this $1.97 in dividends per share gives Fortescue stock that 10.61% yield at the current share price of $18.57.

However, whilst this tells us something about Fortescue's past performance as an investment, it says very little about its future potential. As any good income investor knows, a dividend yield only reflects past income received, not future income potential. No ASX share is required to maintain a previous year's dividend payments. And Fortescue stock's income is particularly unpredictable.

As a mining stock, Fortescue's profitability is highly dependent on the price of iron ore. When prices are high, Fortescue's relatively low production costs usually translate into high dividend payments for shareholders. However, if iron ore prices are low, Fortescue's income potential is severely diminished.

That's why we saw this company pay out $3.58 in dividends per share over 2021, but only $1.75 per share in 2023. Not to mention 2018's grand total of 23 cents per share.

Iron ore's rough 2024

Unfortunately for investors, iron ore prices haven't been having a great year in 2024 to date. The industrial metal has dropped from around US$135 a tonne back in January to roughly US$103 per tonne today.

If you were wondering what has driven Fortescue stock down 36.6% over 2024 to date, this drop in iron ore prices is a likely culprit.

This fall arguably means that, unless there is a dramatic rebound in prices, it is highly unlikely Fortescue will be able to fund the same dividend payments over 2025 as it has over 2024. And that, in turn, indicates that the miner's trailing dividend yield is about as reliable as a chocolate teapot right now.

That doesn't mean Fortescue stock won't pay out meaningful dividends going forward, though. Let's say Fortescue doles out only half of the dividends it paid out in 2024 next year. If the miner hypothetically forks out 98.5 cents per share in dividends over 2025, it would trade on a forward yield of 5.3% at the current share price.

Keep in mind that this potential scenario is only possible thanks to Fortescue's steep share price drop this year. Remember, a falling share price boosts a company's potential dividend yield.

Foolish takeaway

Fortescue still has plenty of potential as a dividend stock. Iron ore prices would have to fall to diabolical levels for this company's dividend-paying ability to completely dry up.

However, thanks to the drops we've seen this year in the iron ore price, I don't think it is likely that Fortescue stock will pay out anything approaching a 10.54% dividend yield going forward. So income investors, approach this stock with caution.

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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