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Is the BHP share price a buy for dividends?

Is the BHP Group Ltd (ASX: BHP) share price a buy for dividends right now?

At the current share price BHP offers a grossed-up dividend yield of 7.6%. This yield is on par with the big ASX banks. Australia and New Zealand Banking Group (ASX: ANZ) has a grossed-up dividend yield of 8.2% and Commonwealth Bank of Australia (ASX: CBA) has a grossed-up dividend yield of 7.8%.

Any investor that thinks their portfolio is diversified because they own just four different banks is kidding themselves.

BHP isn’t a bad way to diversify your dividend income. The returns of resource businesses are pretty uncorrelated to the returns offered by other industries like financial shares or tech shares.

I like that the resource giant offers investors diversified exposure to the commodities of coal, oil and iron. Different resources have different cycles, so you’d think BHP can be less volatile than some other commodity businesses.

I also like that BHP is focusing on having a higher focus on environmental factors. It’s not illegal to sell ‘fossil fuels’ but BHP needs to be mindful that there could be a backlash against its products if it doesn’t make some moves to improve the eco footprint of the resources it sells.

BHP shareholders have been rolling in cash returns over the past 12 months from strong resource prices, asset sales and the worry about franking credits. I doubt the cash return over the next 12 months will be as good as the last 12 months but it could still be attractive if prices stay relatively high.

But that relies on the global economy and China remaining strong. Who knows what’s going to happen next with the trade war and the US economy?

Foolish takeaway

The best time to buy BHP shares is when the commodity cycle is at a low point rather than a high point, so I’m not sure it’s a good idea chasing a resource business at close to the top of its game. BHP is trading at just over 13x FY21’s estimated earnings.

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Motley Fool contributor Tristan Harrison has no position in any of the 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 Scott Phillips.