Is BHP one of the best dividend shares on the ASX?

In this era of extremely low interest rates, is BHP Group Ltd (ASX:BHP) one of the best dividend shares on the ASX?

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Interest rates are extremely low at the moment and could drop even lower. With the search for income, is BHP Group Ltd (ASX: BHP) one of the best dividend shares on the ASX?

BHP was definitely a huge cash machine for shareholders in FY19 with huge dividend payouts as well as a big share buyback.

Indeed, until 2016 the huge resource giant was a popular dividend share for many investors because of its preference for paying out big and sustainable dividends.

Oil and particularly iron are at good resource prices – we can expect BHP's dividend to be pretty good in these conditions. In FY20 the dividend is estimated by analysts to be $1.96 per share, which translates to a grossed-up dividend yield of 7.1%.

The hard thing is knowing where the dividend is going next because the earnings are unpredictable. BHP can influence its costs and can decide how much it's going to produce, but it can't control the resource prices.

BHP's results can look very different if iron prices go up 10% or if they go down 10%.

It's unlikely that iron ore prices will remain this strong consistently for the next few years.

However, just because there is some unpredictability and variability with BHP's earnings and dividends doesn't mean it's a bad choice. Indeed, it could be a more attractive option if you take the long-term approach because $1 of earnings and $1 of dividends is worth as much from BHP as it is from Microsoft or another tech company, yet BHP's earnings aren't priced as highly. 

Foolish takeaway

BHP is trading at 15x FY21's estimated earnings. It's certainly not a terrible price, but it would be a fair guess that we're closer to the end of this strong resource cycle than the start which is why I'm hesitant about buying at this relatively high share price. For dividends I think there are better opportunities out there today.

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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