When it comes to ASX dividend shares, finding a share that will consistently give you a high yield is a popular goal. And finding one that can keep delivering dividend increases might be the Holy Grail.
But dividend investors also have to be ever-watchful for the dreaded ‘dividend trap’. This describes the situation where an investor buys an ASX dividend share under the pretext of assuming that its trailing dividend yield will be consistent going forward, only to have the company cut its dividend afterwards. This not only results in a loss of potential dividend income but can also come with a capital loss as investors re-rate the shares’ valuation accordingly.
So here are 2 ASX dividend shares that according to CommSec broker Goldman Sachs, might treat investors to such a situation.
2 ASX shares that could be dividend traps
AGL Energy Limited (ASX: AGL)
AGL shares have not had much of a fun time lately. The AGL share price is currently trading at $9.04, down 25% year to date and almost 50% over the past 12 months. Falling earnings, a difficult national electricity market and the declining value of some of AGL’s energy generation assets (mainly coal-fired power plants) are most likely behind this. This decline has given AGL shares a seemingly attractive trailing dividend yield of 9.07%.
But Goldman reckons that the 98 cents per share in dividends that AGL paid out to investors in FY2020 will fall to 74 cents for FY2021, 72 cents for FY2022 and 56 cents for FY2023. I’m sure shareholders will be hoping that doesn’t play out.
Fortescue Metals Group Limited (ASX: FMG)
Fortescue has been a top S&P/ASX 200 Index (ASX: XJO) performer over the past year, with Fortescue shares up 51.5%. They are also up a staggering 600% in the past 5 years. And those number’s aren’t even including the hefty dividends the iron ore giant has paid out either. These lofty gains are likely the result of a rampaging iron ore price, which has spent much of 2021 at historically high prices above US$200 a tonne.
On the current Fortescue share price, the company has a whopping 10.96% trailing dividend yield. Goldman expects Fortescue to pay out US$2.37 ($3.06) in dividends in FY2021, up substantially from the US$1.18 ($1.52) it paid out in FY2020. However, it also is expecting these dividends to fall to US$1.26 ($1.63) per share in FY2022 and 81 US cents ($1.05) by FY2023. That would be a substantial income haircut if Goldman’s expectations translate to reality.