Could the BHP (ASX:BHP) dividend be set for a boost?

Will the company increase its dividend?

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The BHP Group Ltd (ASX: BHP) dividend might be amplified next year.

The world’s second largest miner has handsomely rewarded shareholders over the years with consistent payouts. However, the upcoming demerger of its petroleum and coal assets could lead to a bumper dividend.

At Monday’s market close, BHP shares finished the day down 1.59% to $39.59.

A quick refresher on the BHP dividend

After reporting its FY21 full-year results, the board declared a record fully-franked final dividend of US$2 (A$2.7152) per share. Coupled with its interim dividend of US$1.01 (A$1.31), this brings the total FY21 dividend to US$3.01, a 151% increase on FY20.

Based on the last closing BHP share price, this implies a trailing dividend yield of 10.17%.

Is a higher dividend payment on the cards?

Last month, BHP announced that it is selling its 80% interest in BHP Mitsui Coal (BMC). 

Stanmore Resources will acquire metallurgical coal mines, the South Walker Creek and Poitrel coal mines. 

The US$1.35 billion purchase price is made up of US$1.2 billion in cash and a potential follow-up payment of up to $150 million after two years linked to the performance of coal prices.

The transaction is said to be consistent with BHP’s decarbonisation strategy as it pulls away from fossil fuels.

In August, the company unveiled a deal with Woodside Petroleum Limited (ASX: WPL) to offload oil and gas operations in exchange for new shares.

In June, BHP agreed to the sale of the Cerrejon thermal coal mine to Glencore Plc for around $294 million.

A strong free cash flow coupled with BHP’s balance sheet could mean that shareholders are rewarded with an increased dividend. This is because of the reduced capital expenditure due to the divestments, and the company’s dividend policy. The latter states that a minimum of 50% of underlying earnings are returned to shareholders each year.

While BHP will be a smaller company in terms of revenue, the ample free cash flow could see its dividend payout ratio actually rise above 80%. This is subject to the price of iron ore remaining stable for the foreseeable future. 

It’s anyone’s guess how much BHP will give, but any increase is likely to be supplemented in the mid-2022 dividend.

About the BHP share price

Since the beginning of the year, the BHP share price has moved in circles following a volatile market environment. Its shares are slightly in the red, down 5% for the past 12 months.

This is a stark contrast from when its shares were tracking almost 30% higher for the year-to-date period during August.

Based on today’s price, BHP presides a market capitalisation of roughly $116.80 billion and has approximately 2.95 billion shares outstanding.

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

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Motley Fool contributor Aaron Teboneras owns shares of Woodside Petroleum Ltd. 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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