One of the biggest risks for income investors is buying an ASX stock based on its current dividend yield.
The reason for this is because a dividend yield is usually based on the dividends the company has paid over the last 12 months. This is why it is also referred to as a trailing dividend yield.
The issue here is that there is no guarantee that the company will be in a position to pay this kind of dividend again over the next 12 months.
For example, the embattled Magellan Financial Group Ltd (ASX: MFG) currently trades with a trailing dividend yield of 14.5%. However, due to its significant underperformance, shareholders may be lucky to even get a dividend in FY 2023!
With that in mind, let's take a look at one ASX stock that trades with one of the biggest dividend yields on the Australian share market.
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Is this ASX stock really going to pay such a big dividend in 2023?
The ASX stock in question is coal miner Yancoal Australia Ltd (ASX: YAL).
As a reminder, over the last 12 months, Yancoal Australia has rewarded its shareholders with dividends of 70.4 cents per share and 52.7 cents per share. Combined, this is a total of 123.1 cents per share, which equates to a whopping trailing dividend yield of 20%.
While it is impossible to say what the Yancoal Australia board will decide to pay to shareholders in 2023, another dividend of 123.1 cents per share certainly seems possible.
Why 20%+ could be possible in 2023
The company's FY 2022 interim dividend of 52.7 cents per share equates to a total dividend payment of $696 million. Based on this, a 123.1 cents per share dividend is the equivalent of approximately $1,625 million being returned to shareholders.
So, in order to maintain this dividend, Yancoal needs to have at least $1,625 million in free cash flow available to return to shareholders.
During the first half of calendar year 2022, the ASX stock reported a realised average price of A$314 per tonne for its mix of coal. This helped underpin the bumper interim dividend mentioned above.
Pleasingly, since then, coal prices have been even stronger. So much so, the company averaged A$481 per tonne for its coal during the third quarter of 2022.
This led to the company's cash balance increasing by a staggering $1.9 billion during the three months. That quarterly increase in cash is more than what is needed to pay all the dividends it paid over the last 12 months and more.
And with coal prices remaining strong today, the company's cash balance looks likely to receive equally large boosts in the coming quarters.
All in all, I believe this ASX stock is well-placed to be able to afford to pay dividends that equate to a 20% yield in 2023. But whether its board decides to do so, we'll have to wait and see.
