The Australian share market is home to a good number of dividend shares with generous yields.
However, as dividend yields are usually reported on a trailing basis, investors need to be careful that they don’t buy shares on the expectation that the last dividend is indicative of what will be paid over the next 12 months.
For example, the three ASX shares listed below show up on many websites as offering 20%+ yields. Is this really the case?
Fortescue Metals Group Limited (ASX: FMG)
On Google, Fortescue shows up with a fully franked 25% dividend yield. While this is accurate based on its FY 2021 dividends, analysts are tipping the iron ore giant to pay a significantly reduced dividend in FY 2022. This is due to a sizeable pullback in the iron ore price and the weaker outlook for the low grade iron ore that Fortescue mines. Goldman Sachs is expecting fully franked dividends per share of US$1.02 in FY 2022 and 61 US cents in FY 2023. This will mean yields of 9.7% and 5.8%, respectively, over the next two financial years. Great yields, but nowhere near the 25% some investors may have been hoping for.
iShares S&P 500 AUD Hedged ETF (ASX: IHVV)
This index-tracking exchange traded fund apparently offers investors a 21% yield at current prices. However, this is even more misleading than the previous example. As my colleague explains in detail here, this ETF periodically rebalances its holdings. This is achieved by selling the shares that have increased outside their index allocations and by buying the shares that go under. This left the iShares S&P 500 AUD Hedged ETF with surplus cash, which is then returned to existing unit holders in the form of dividend distributions. The actual dividend yield provided by this ETF is closer to 1.3%.
Regal Investment Fund (ASX: RF1)
Finally, Regal Investment Fund’s shares show up as offering a 25% yield at current prices. However, it is worth noting that this dividend yield is the result of a profit surge in FY 2021 after the fund delivered a whopping return of 62.75% net of fees. This allowed the company to make a significant increase to its full year dividend. However, it is impossible to know if Regal Investment Fund will be able to come close to replicating its success again in FY 2022. As a result, if its dividend were to drop back down to the FY 2020 level of ~23 cents per share, it would mean a yield of 6.8% rather than a 25% yield.