MENU

3 dangerous ASX dividend shares

The dividends from BHP Billiton Limited (ASX: BHP), Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) shares may not be as reliable as you think.

What makes a good dividend investment?

Almost everyone knows share dividends are not guaranteed. At best, they can be reliable and grow over time. Unfortunately, few companies can offer growing dividends each and every year.

That’s why companies which have done just that — such as Commonwealth Bank of Australia (ASX: CBA) — become some of the most valuable on the entire market.

But being a good dividend-paying company is more than just paying a reliable dividend to shareholders. Many companies on the ASX that pay consistent dividends may not have a business model that lends itself to dividend payments over time.

For example, is it a good idea if the company pays a dividend each year but is also loading up on debt? Is a good idea if the company issues shares to pay dividends? Of course, it isn’t.

Ideally, long-term investors — and by that I mean those who are investing for five years or more — should be finding companies which have growing profits, improving margins and recurring revenue. These features should help the company generate good cash flows and not need to raise capital from investors or lenders.

What’s wrong with resources?

If I was going to buy any resources shares Rio Tinto, BHP and Fortescue would be at the top of my watchlist. However, if I were relying on dividends each and every year, I would not buy them in big proportions because I do not believe their businesses lend themselves to providing a stable income for shareholders.

Sure, over the past decade, BHP and Rio Tinto have produced decent dividend returns. However, one fundamental problem they have is that they cannot set the prices of their products (think iron ore, aluminium, coal, etc.)

So although they have strong businesses and are unlikely to go bust, their cash flows can be volatile because commodity prices can rapidly rise and fall depending on supply and demand.

Foolish Takeaway

Investing in shares is high risk compared to term deposits and savings accounts. In my opinion, resources shares do not make ideal investments for long-term income-seeking buy-to-hold investors. While some investors may target resources shares for growth, I think it would be a dangerous idea to rely on them for a consistent income stream.

Forget BHP! Here's The Motley Fool's #1 Dividend Pick for 2017

With its shares up 96% in just the last five years, this 'under the radar' consumer favourite is both a hot growth stock AND our expert's #1 dividend pick for 2017. Now we're pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is click the link below!

Simply click here to receive your copy of our brand-new FREE report, "The Motley Fool's Top Dividend Stock for 2017."

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.