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Should you buy shares in BHP Billiton Limited for its dividend?

Credit: Lucas Walters

The BHP Billiton Limited (ASX: BHP) share price has jumped 3% in early trading today to $24.95, but still boasts a fully franked dividend yield of 3.5%, according to Commsec.

In the 2016 financial year, the giant resources company paid out just 40.4 cents in dividends, but consensus forecasts expect that to rise to $1.28 in the 2017 financial year (FY17). That represents a yield of 5.1% – or 7.4% when the franking credits are included.

The miner has already eclipsed the total FY16 dividend with an interim dividend of 53.2 cents – which investors will receive on March 28. And if commodity prices, including iron ore, copper, coal, nickel, gas and petroleum can maintain their current levels, the miner could easily increase its dividend again when it reports its full-year results later this year.

In the first half of FY17, BHP received an average realised price of US$55 per tonne of iron ore, generating US$6.9 billion in revenues – well above the US$4.2 billion the company received for copper and US$3.9 billion for coal. Iron ore is still the main driver of where BHP’s earnings go.

The good news for shareholders is that the current iron ore price is above US$90 a tonne, and continues to surprise many analysts and market commentators with its resilience. It’s also 135% above the US$38.30 a tonne level it hit back in December 2016 – as the chart below shows.

10 year iron ore price March 2017

Source: IndexMundi

Could the price head back to US$180 a tonne? That appears unlikely, with more supply coming onstream, and medium and higher cost producers now able to re-enter the market. However, moves by Chinese officials to clamp down on pollution from sintering plants – which are used to refine low-grade iron ore – means demand for higher grade iron ore is rising.

The problem for BHP shareholders is that commodity prices are unpredictable. Oil prices have been falling and many analysts don’t think the current iron ore price is sustainable. Capital Economics chief ANZ economist Paul Dales expects the iron ore price to sink back to US$50 a tonne and coal prices to ease as well. Fortescue Metals Group Limited (ASX: FMG) chairman Andrew Forrest has told Bloomberg that he expects the iron ore price to ‘trim down’, and some analysts expect the price to halve.

Foolish takeaway

There are better alternatives than BHP if investors are looking for yield – without the risk of depending on where commodity prices go.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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