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Why I’m not buying into BHP Billiton Limited’s 10.7% dividend yield

BHP Billiton logo
Credit: Lucas Walters

It’s hard to argue with the monstrous dividend yield offered by BHP Billiton Limited (ASX: BHP) in this low interest rate environment.

At a time where individuals would be lucky to receive a 3 per cent return by investing their money in a term deposit or a ‘high interest bearing’ account, those same individuals could make 7.5 per cent of their money back simply by investing in BHP Billiton’s shares.

When you include the franking credits attached to those dividends, that’s a whopping 10.7 per cent grossed-up dividend yield.

Better yet, the company pays those dividends in US dollars, meaning that the yield will only increase as the Australian dollar falls.

If it sounds too good to be true, it probably is…

It’s extremely rare that investors are offered a dividend yield like that being offered by BHP Billiton right now. In fact, The Sydney Morning Herald recently quoted analysts who described the yield as having reached “once in a lifetime” levels.

If its yield is so great, then why hasn’t the market swarmed towards the stock?” I hear you ask.

It’s a fair question – especially considering the euphoria that has surrounded the Big Four banks in recent years. And their yields were nothing compared to what is currently being offered by BHP!

Instead of swarming into the company’s shares however, investors are selling the miner off en masse.

It’s down another 2.6 per cent today at just $24.06 per share, and down almost 28 per cent over the last 12 months, heavily underperforming the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and various blue-chip corporations such as Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) in the process.

More pain to come

Ordinarily, when a company is offering a yield like that of BHP Billiton’s, that yield will act as something of a support for the company’s shares.

Indeed, that could be the case with BHP — without the dividend, the shares could have fallen considerably lower by now. But investors are still selling the stock down.

The fact is, the resources sector is facing strong headwinds – largely as a result of China’s waning economic growth and the subsequent crash in commodity prices. Although BHP Billiton maintains low-cost operations and is well diversified, it’s still in the same boat as each of its peers.

While the yield on offer might be tantalising, the impact of the falling share price could more than offset any gains to be made from the dividends received.

While I believe BHP Billiton is deserving of a position on your long-term watchlist in case the shares fall considerably below today’s level, I do not believe it presents as a standout buy today. Thankfully, there are plenty of great alternatives if it’s solid dividends that you seek.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

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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