Should investors buy Fortescue (ASX:FMG) shares in September 2021 for the 16% dividend yield?

Could Fortescue could be a good option for dividends?

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The Fortescue Metals Group Limited (ASX: FMG) share price could be one to consider for the dividend yield after the iron ore giant’s big price decline in recent weeks.

How much has it fallen?

Over the last month the iron ore miner has fallen 21%. It has fallen over 40% since 29 July 2021. That is a large decline considering Fortescue is one of the biggest ASX shares. Even after the plunge, the market capitalisation is now $45.4 billion according to the ASX.

The iron ore price has seen a huge decline. In May 2021 the price was more than US$230 per tonne and it has since dropped more than US$130 per tonne. That reduces the profit potential of Fortescue because iron ore is what it is focused on.

What has been sending the Fortescue share price and iron ore down?

There have been various issues that have been on investor’s minds. Supply from Brazil is expected to increase in the coming months. Demand from China is reducing as authorities told steel producers to cut production to decrease emissions.

But over the last week, there was concern that the Chinese developer Evergrande may collapse. Everegrande is one of the largest users of steel (and iron ore). However, as reported by my colleague Kerry Sun:

According to Reuters, Evergrande Group’s main unit, Hengda Real Estate Group Co Ltd, said that it will make a bond interest repayment on Thursday, 23 September.

Despite the small win, Evergrande will continue to face stress tests with another 7-year dollar bond due next Wednesday, 29 September.

The real estate conglomerate has seen its liabilities balloon to over US$300 billion and has already fallen behind in payments to stakeholders including banks, building suppliers and holders of investment products.

Is the Fortescue share price a buy for its 16% dividend yield?

The business isn’t likely to generate as much profit in FY23 as FY21. However, due to the profit decline, the prospective dividend is still quite high.

Analysts at Morgans think that Fortescue is going to pay a FY23 annual dividend of $1.757 per share. That represents a grossed-up dividend yield of 16.3%.

However, despite projecting a large dividend in the coming two years, Morgans rates the Fortescue share price as a sell with a price target of $14.15.

The broker thinks there will be continuing pressure for the iron ore price.

UBS also believes that Fortescue shares are a sell after the rapid decline of the iron ore price. UBS is even more bearish on the dividend that Fortescue could pay in FY23 – it’s expecting a full year payment of $1.327 per share. That translates to a grossed-up dividend yield of 12.3%. UBS reckons the current Fortescue share price is valued at 12x FY23’s estimated earnings.

Should you invest $1,000 in Fortescue right now?

Before you consider Fortescue, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Fortescue wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

Motley Fool contributor Tristan Harrison owns shares of Fortescue Metals Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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