At the current Fortescue Metals Group Limited (ASX: FMG) share price, the company is expected to pay a huge dividend yield. But is this enough to make it attractive?
Firstly, let's look at how much income Fortescue is actually expected to pay.
Considering FY22 has finished, we'll look at the projected dividend yield for FY23 and FY24.
Using the numbers on CMC Markets, Fortescue could pay a grossed-up dividend yield of 16% in FY23 and 9.8% in FY24.
Compared to most other ASX dividend shares, those projected yields are much larger than what many other businesses are expected to pay over the next couple of financial years. Fortescue has a dividend policy to pay out between 50% to 80% of full-year net profit after tax (NPAT).
So, on the income side of things, it looks like Fortescue is going to be a 'gold mine' for dividends.
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There's more to returns than dividends
Getting cash dividends can be very rewarding. Fortescue dividends are very generous – I'm a shareholder myself, so I am getting the benefit of those dividends.
But, I'll acknowledge that dividends are only part of the picture. The share price returns are important too. It could be pointless to get a 10% dividend yield but suffer a 10% fall of the share price.
The Fortescue share price has, indeed, fallen by 14% over the past month and 22% since 8 June 2022.
I think it's important to remember that Fortescue's current NPAT and investment sentiment is tied to the iron ore price because that's where nearly all of its profit currently comes from.
The iron ore price has been falling. It's down around US$25 per tonne since the start of June 2022.
Fortescue's profit potential can change quickly, which is why the Fortescue share price can move so quickly as well. The iron ore price and Fortescue profit are expected to settle at a lower level over the next couple of financial years.
The price of iron ore is highly dependent on China buying vast quantities of the commodity. For people reliant on dividend income, it may not be helpful that Fortescue relies on China for its profit generation. That demand can change.
The dividends are definitely an attractive feature of Fortescue shares. But, for me, there is another reason to be interested in the business, particularly at this lower Fortescue share price.
Fortescue Future Industries (FFI)
FFI is a green energy and green technology company. It is being allocated 10% of Fortescue's NPAT each year to help develop a global portfolio of renewable energy and green industry opportunities.
Fortescue Future Industries has a goal of making green hydrogen the most globally traded seaborne commodity in the world. FFI wants to produce 15mt of green hydrogen per annum by 2030. E.ON has agreed to purchase up to a third of that production – five million tonnes.
Another exciting area is Williams Advanced Engineering (WAE), which is described as a leading provider of high-performance battery and electrification technology. FFI says that WAE has already demonstrated a track record of success in advanced engineering in premium automotive and motorsports sectors.
WAE has an important part to play in Fortescue's decarbonisation. For example, it's helping Fortescue create an 'infinity train'. This promises zero emissions by using a regenerating battery, utilising gravitational energy to fully recharge its battery electric systems without any additional charging requirements for the return trip to reload. It will also reportedly lower operating costs and create maintenance efficiencies
Foolish takeaway
Fortescue's dividends are attractive but are expected to reduce in the coming years. I'm cautious about the outlook for the iron price. However, the green FFI division has a very promising outlook in my opinion, which is why I like the business.
