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Does this ASX blue chip offer a forward dividend yield of 17%?

ASX blue chips are known for having large dividend yields compared to other countries.

Despite the dividend cuts and low interest rates, it’s still possible to get pretty good dividend yields from Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Wesfarmers Ltd (ASX: WES) and Telstra Corporation Ltd (ASX: TLS).

But there’s one blue chip that has a market capitalisation of around $30 billion and one estimate puts the projected FY20 grossed-up dividend yield at 16.8%, or 11.8% before franking credits. That business is Fortescue Metals Group Limited (ASX: FMG).

The iron price has remained solid so far in FY20, so while the dividend payments in FY20 aren’t likely to be as big as FY19’s, it could still be an exciting amount.

It’s estimated that Fortescue’s FY20 dividend will amount to $1.15 per share with earnings per share (EPS) of $1.86. Only time will tell whether these numbers are close or completely off.

In an era of extremely low interest rates I can understand why some investors would be drawn to such a large dividend yield. But who knows how long the annual dividend will remain above $1 per share? The iron price could fall in 2020 – it really depends on the demand coming out of China.

If I were a retiree relying on income I wouldn’t be very comforted knowing that I’m relying on China to indirectly pay for my expenses.

Foolish takeaway

Fortescue may be only trading at 5x FY20’s estimated earnings, but it’s valued at 8x FY21’s estimated earnings where there’s a projected fall in earnings. Fortescue certainly has a large dividend, but it’s not the type of bet I’d want to make.

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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.

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