Should you buy these 3 companies for their 6% dividends?

With technology nowadays, it’s easier than ever to search for companies that fit the criteria you want. Why settle for the 4.5% dividend of Wesfarmers Ltd (ASX: WES) when your online broker can generate a list of companies paying 6%, 7%, or even 10% dividends?

There are a few risks to this strategy however, namely that said dividends can often prove dangerously deceptive. Here’s my take on these 3 companies’ big dividends today:

Fortescue Metals Group Limited (ASX: FMG)

With iron ore prices at current levels, Fortescue is generating a lot of cash, rapidly paying down its debt, and distributing an attractive yield to shareholders. However, it is a miner and remains vulnerable to changes in iron ore prices. Additionally, Fortescue will likely have to increase its expenditure on exploration in the future, potentially reducing the amount of cash available for dividends. Its payout ratio (dividends as a % of profit) was just 38% at the most recent half year, however, suggesting that the current dividend is sustainable even if ore prices decline somewhat.

Telstra Corporation Ltd (ASX: TLS)

Telstra Corporation’s big dividends could be coming to an end, with the company paying out more in dividends than it made in profits in the half year. This is not as unusual as it might sound, as Telstra aims to ‘average out’ its dividends over the full year to take into account the timing on payments and so on. However, with a 14% decline in earnings per share at the most recent half, many investors are wondering if the telco’s 7% fully franked dividend is sustainable.

Importantly, even if the dividend is cut somewhat, Telstra retains a very strong brand and dominates the mobile market. It is seen as having highly reliable earnings, which allow it to borrow debt at a very low price.  So while Telstra’s dividend might get cut somewhat, shares should still offer an attractive, sustainable yield.

Crown Resorts Ltd (ASX: CWN)

Crown’s high yield, as shown by some brokers, is an illusion due to the payment of a special dividend of 83 cents in the recent half. As normalised profit actually shrank, Crown’s future dividends are likely to be much closer to the ~72.5 cents ordinary dividends paid in the last 12 months. That would be a still-attractive dividend yield of 5.9% or less, but it may fall somewhat bearing in mind that profits were lower in the first half.

And if you're looking for companies that are growing dividends, well, forget about Telstra, Crown, and Fortescue. Instead, discover out our analysts' latest top stock picks:

Top 3 ASX Blue Chips To Buy In 2017

For many, blue chip stocks means stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool's in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool's Top 3 Blue Chip Stocks for 2017."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

If you're expecting to see the likes of Commonwealth Bank, Telstra and Wesfarmers shares on this list, you'll be sorely disappointed. Not only are their dividends growing at a snail's pace, their profits are under pressure too due to the increasing competitive environment.

The contrast to these "new breed" blue chips couldn't be greater... especially the very real prospect of significant share price gains, something that's looking less likely from the usual blue chip suspects.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand - and how quickly the share prices of these companies moves - we may be forced to remove this report.

Click here to claim your free report.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Crown Resorts Limited. Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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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