3 reasons why I plan to own my Fortescue shares for the long term

Fortescue is one of the larger positions in my portfolio. I like it for a few different reasons.

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Key points

  • I am a shareholder of Fortescue for a few key reasons, including its big dividend
  • In my opinion, the green-focused Fortescue Future Industries (FFI) is also compelling
  • However, I’m not compelled to buy more shares at the current Fortescue share price

There are a few different reasons why I like Fortescue Metals Group Limited (ASX: FMG) shares.

Fortescue is one of the world’s biggest iron ore miners along with BHP Group Ltd (ASX: BHP) and Rio Tinto Limited (ASX: RIO).

Fortescue is one of the larger positions in my share portfolio. However, I must acknowledge that the average purchase price for my shares is materially lower than the current Fortescue share price of $20.15.

I decided to invest in the business when the iron ore price was below US$100 per tonne. These are the three factors why I bought shares and plan to hold my investment for the long term:

Reputation for big dividends

There are two main ways for investors to benefit from shares – dividends and the rise in share prices.

As a resources business, Fortescue usually trades on a low price-to-earnings (p/e) ratio. When combined with a high dividend payout ratio, this can lead to a high dividend yield. The dividend yield can be particularly high when the relevant commodity price goes to a relatively high level.

Fortescue is benefiting from a reasonably strong iron ore price and this is translating to good cash flow and big dividends.

The dividend estimate on Commsec suggests Fortescue will pay a grossed-up dividend yield of 13.25% in FY22.

Green industry focus

Fortescue has a division called Fortescue Future Industries (FFI) which is aiming to decarbonise the iron ore miner’s operations. FFI also wants to help industries lower emissions in hard-to-abate sectors such as shipping, airplane fuel, trains, and so on.

FFI is building a portfolio of projects that will enable the business to create 15mt of green hydrogen per annum by 2030. It has entered into a memorandum of understanding with E.ON, to supply up to five million tonnes of green hydrogen by 2030. It has also established a ‘working alliance’ with Airbus to facilitate the decarbonisation of the aviation industry with green hydrogen.

I think FFI has a lot of potential if it’s able to execute on most of its goals. Trillions of dollars may be needed to be spent on decarbonisation in total in the coming years, which could benefit FFI and Fortescue.

Inflation hedge

In my opinion, some commodity businesses can prove to be an effective inflation hedge.

If there’s more money in the economic system and the same amount of commodities, it would be natural for commodity prices to go up.

Of course, commodity prices don’t perfectly track the inflation rate. Resource prices can see wild swings year to year or even quarter to quarter. Supply and demand is an important part of this.

Is Fortescue an effective inflation hedge? Time will tell. But, since the beginning of 2022, the Fortescue share price is essentially flat while the S&P 500 Index (SP: .INX) has fallen by around 20%.

Foolish takeaway

I’m not currently looking to buy more Fortescue shares, I’d prefer to buy at a cheaper price considering it’s already a decent size of my portfolio. However, I am quite optimistic about Fortescue’s long-term future with its green industrial endeavours.

Motley Fool contributor Tristan Harrison has positions in 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 Scott Phillips.

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