If one looks at Fortescue Metals Group Limited (ASX: FMG) shares today, no doubt one metric in particular will jump off the page: Fortescue's massive dividend yield.
At the time of writing, the Fortescue Metals share price is going for $22.22, up a healthy 1.21% for the session thus far:
At this share price, Fortescue shares have a trailing dividend yield of 9.32%.
This rather monstrous dividend yield comes from Fortescue's last two dividend payments. Those consisted of the March interim dividend of 86 cents per share, as well as September's final dividend worth $1.21 per share.
Both payments came fully franked, which means this already massive dividend yield grosses-up to a whopping 13.31% with the value of these franking credits.
So Fortescue shares are a no brainer for passive income investors seeking large dividends, right? Who wouldn't want to get more than $9 in annual cash dividends for every $100 invested?
Is the Fortescue dividend a source of safe passive income?
Well, it's not that simple. Dividends are not term deposits and ASX shares are not banks (with the exception of the bank shares, of course). A company is under no duty, responsibility, or obligation to fund its dividends at last year's levels. Or to fund a dividend at all, in fact.
If Fortescue wished, it could announce tomorrow that it will never pay a dividend again.
Of course, this is unlikely. But Fortescue does have a dividend policy. According to the company, Fortescue targets dividend payments worth 80% of its full-year net profits after tax (NPAT).
However, investors need to consider this. Fortescue is almost solely a pure-play iron ore miner. As such, its profits are nearly entirely dependent on the price of iron ore. Right now, the industrial metal is trading at historically high levels of more than US$120 a tonne.
But in the past 10 years, iron ore has been as low as US$39 per tonne. Iron is an extremely cyclical commodity that tends to function as a bellwether for economic growth. During the next recession, whenever that might be, you can bet that the iron ore price will experience a significant slide.
And that will put a serious dent in Fortescue's profits and, by extension, its dividends.
So, no, Fortescue's 9%+ dividend yield is not 'safe' for passive income investors. Nor will it ever be.
If you want a truly 'safe' income stream, term deposits, government bonds, and annuities are where to look, not dividends from ASX shares.
But that doesn't mean Fortescue shares won't remain a significant source of passive income for ASX investors well into the future. They might, and probably will be. We just can't call this passive income source a safe one.
