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.

| More on:
Two men in hard hats and high visibility jackets look together at a laptop screen at a mine site.

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

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.

Should you invest $1,000 in Vulcan Energy Resources Limited right now?

Before you buy Vulcan Energy Resources Limited 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 Vulcan Energy Resources Limited 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 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 »

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

Why Fortescue shares were just upgraded by UBS

UBS thinks Fortescue’s sell-off has been overdone.

Read more »

Miner looking at a tablet.
Resources Shares

Why is the Mineral Resources share price racing ahead of the ASX 200 on Monday?

Investors are bidding up the Mineral Resources share price on Monday. Is this why?

Read more »

Woman calculating dividends on calculator and working on a laptop.
Resources Shares

$10,000 invested in BHP shares 5 years ago is now worth…

Investors would have done well to heed Warren Buffett’s advice and buy BHP shares five years ago.

Read more »

Miner looking at a tablet.
Resources Shares

Why are ASX copper shares seeing gold today?

Copper prices continue to surge amid uncertainty on global trade.

Read more »

A boy is about to rocket from a copper-coloured field of hay into the sky.
Resources Shares

ASX All Ords copper stock lifts off on $950 million funding news

The ASX All Ords copper miner is grabbing investor attention on Friday.

Read more »

Miner looking at a tablet.
Resources Shares

Pilbara Minerals shares are down 49% in a year. Time to buy?

Pilbara Minerals shares have surged over the past week but remain down 49% in 12 months.

Read more »

Two men in hard hats and high visibility jackets look together at a laptop screen at a mine site.
Resources Shares

Rio Tinto warns share price could slump 11% if this happens

Investors may need to think twice about this proposed idea.

Read more »