Shareholders of BHP Billiton Limited (ASX: BHP) will receive an 87.78 cent per share dividend for each share they owned on 9 September 2015.
Although the diversified miner declared a final dividend of just US 62 cents when it reported its full-year earnings last month, Australian investors will benefit from favourable movements in the exchange rate with the local currency now fetching just US 70 cents. BHP Billiton stated that its final dividend would be paid based on an exchange rate of US 70.63 cents, taking it to 87.78 Australian cents per share.
That takes the total amount received for the 2015 financial year to 168.6 cents, giving the company a trailing 7.1% fully franked dividend yield, or 10.2% when grossed up for franking credits.
It's extremely rare that you get such a large, well-known company trading on such a lucrative dividend yield. Not even Commonwealth Bank of Australia (ASX: CBA) offered that kind of yield when its dividend was most attractive in the 2012 financial year, at which time it offered 6.75% fully franked, or 9.6% when tax credits were included.
Although BHP Billiton has recommitted to its 'progressive dividend policy' however, a word of caution seems necessary. The reason BHP Billiton offers such an enormous dividend yield is that investors continue to sell the shares, based on the assumption the stock has further to fall, likely offsetting any potential gains to be made from the dividend itself.
The fact is, BHP Billiton, like most other miners, is suffering as a result of crashing commodity prices. This has already had a huge impact on the miner's earnings (with BHP now paying out more in dividends than it is recognising in earnings) with the situation threatening to get worse in the years to come.
BHP Billiton may have committed to its dividend policy, but it is also seen as unsustainable in the medium- to long-terms. Relying on this lucrative dividend for market-beating returns seems like a very dangerous strategy, and one that could ultimately burn those investors who choose to play with fire.
Based on its sheer size and low cost operations, BHP seems deserving of a position on your long-term watchlist but at this price appears to carry too much risk to warrant an investment.
