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Are these 3 ASX 200 shares with yields above 7% a buy or dividend trap?

Many S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO) dividend shares have suspended their FY20 guidance and distribution. Classic names such as Sydney Airport Holdings Pty Ltd (ASX: SYD) have withdrawn dividends, while the likes of Transurban Group (ASX: TCL) have chosen to raise more debt.

In such uncertain times, could these 3 ASX 200 shares that are currently paying a yield of more than 7% be a buying opportunity, or a dividend trap? 

1. Fortescue Metals Group Limited (ASX: FMG) 

Fortescue currently pays a dividend yield of 8.65%. In its 1H20 report, the company announced a fully franked interim dividend of 76 cents per share while delivering an earnings per share of 116.4. This represents a dividend payout ratio of approximately 65%. This provides the company with some degree of flexibility should earnings weaken in the next period. 

While the iron ore spot price may not be fetching its highs of 2019, it has remained a resilient commodity. This is likely to continue as China slowly reopens its economy and flexes its demand for commodities. Additionally, the world’s largest iron ore miner, Vale SA, has also slashed its 2020 guidance for iron ore fines and pellets by 20 to 25 million tones. Overall, economic conditions may not be optimal, but the suply and demand dynamics are likely to continue to support the iron ore spot price in the short term. 

2. WAM Capital Limited (ASX: WAM) 

WAM currently pays a dividend yield of 8.20% The company delivered a phenomenal 1H20 result with a 168.4% increase in operating profit before tax. It highlighted that pockets of the domestic economy were showing weakness following strong performance in the August reporting season, affecting sectors such as retail and automotive, while others such as mining services and housing-exposed companies showed promise. 

In the company’s March update it announced that small and mid-cap companies (including those held in the WAM Capital investment portfolio) were impacted by the fast, deep and broad sell-off during March. At the beginning of March, WAM began to restructure its portfolio to increase liquidity and reduce exposure to cyclical sectors, in particular mining services and retail companies. During the month it invested in or added to positions in agricultural companies and larger, high quality businesses at depressed valuations. The portfolio’s cash weighting was at 32.6% at the time of the update. 

I believe WAM shields investors from having to make the tough decisions themselves. The company has a strong track record of performing through thick and thin, while delivering a market leading dividend yield. 

3. IOOF Holdings Limited (ASX: IFL) 

IOOF currently pays a dividend yield of 7.69%. The business has made it a recent priority to reshape its business alongside the acquisition of financial services firm, P&I. This acquisition will transform the scale and reach of IOOF, positioning it as the 5th largest platform provider by funds under admin. However, its dividend yield represents a payout ratio of 92%, which is no doubt unsustainable and unfathomable given today’s challenging business conditions.

The company is in a satisfactory cash position with $68.8 million at 31 December 2019, which is able to meet regulatory net asset requirements and also ensure adequate liquidity. Overall, in my opinion IOOF is in a transitory position and perhaps not a reliable investment in a dividend context. 

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Motley Fool contributor Lina Lim 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.