Over the past 14 months, the Fortescue Metals Group Limited (ASX: FMG) share price has gone ballistic. The FMG share price has risen from $1.53 in January 2016 to a high of $7.27 last week — a 375% gain.
But equally as impressive is what Fortescue did earlier this week. Upon announcing its half-year profit result, it declared a fully franked 20 cents per share half year dividend. Half year. Imagine if you bought shares at $1.53, held on for a 14-month gain of 375% and then received the 13% fully franked dividend (read: 18.7% grossed up for the franking credits).
And that's only the half of it (get it?).
Analysts expect Fortescue's full year dividends to total 45 cents per share. Put another way, if you bought at $1.53, it would be an annual dividend yield of 29% fully franked.
A better dividend stock than Fortescue
Now, you might be sitting back and thinking, "What a great dividend stock!"
Oddly enough, however, shares in Fortescue have actually fallen almost 9% in three days.
In my opinion, the recent rally in the Fortescue share price (shown above) can be attributed to two things: massive cost reductions in iron ore production, and an unexpected rally in iron ore prices.
The cost reductions look good. But it is the iron ore price rally that has me concerned because I don't think the China-fuelled rally can continue. And for that reason I'd be wary of buying Fortescue shares today — even if it has a big dividend.
I'd prefer to buy shares in a company that has control over its pricing and can achieve consistent revenue growth to pay a good dividend. Vocus Group Ltd (ASX: VOC) is one such example. The telecommunications company which owns Primus, M2, Amcom, Eftel, Commander, Dodo and more.
Since the beginning of 2016, the Vocus share price halved from over $9 to less than $4. It is currently sitting around $4.50 and is expected to pay a full-year dividend equivalent to a yield of 4.3% fully franked. Hardly a massive yield by Fortescue's standards, I'll admit, but I believe Vocus will make up for it with share price growth.
