Many S&P/ASX 200 Index (ASX: XJO) dividend stocks have paid very large dividend yields for investors. But, are some just yield traps, or will they be dividend machines?
A dividend yield is simply the last year of dividends compared to the share price, expressed in percentage terms.
It's rare to find dividend yields of more than 10%. Remember, the ultra-long-term average return of the share market is 10% per annum. Getting a 10% return with just dividends could be attractive, if the dividends continue at that level and earnings can sustain that payment.
However, some high yields could be dividend traps. This term implies that the next 12 months of dividends may not be as good as the last 12 months. With that in mind, here are three of the largest yields from ASX 200 dividend stocks.
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New Hope Corporation Limited (ASX: NHC)
New Hope is one of the largest coal ASX shares in Australia. It has capitalised on the higher price for thermal coal in the wake of the Russian invasion of Ukraine as nations looked for alternative sources of energy away from Russia.
The business has generated an enormous amount of profit over the past 12 months. In the FY23 half-year result, it generated $669 million of net profit after tax (NPAT), up 103%, and paid a total dividend per share of 40 cents. The last two dividends amount to a grossed-up dividend yield of 24%.
According to Commsec, the ASX 200 dividend stock is expected to pay a dividend of $1 in FY23, which will give a grossed-up dividend yield of 25%.
However, the dividend could fall in FY24 and FY25. The FY25 grossed-up dividend yield could be 17.7%. The dividend income could continue to be market-beating, but the dividend may not be as strong in the coming years.
So, is the New Hope share price a buy? I think it depends what the coal price is going to do, but that's hard to predict. It's certainly not a prediction that I'd want to make to base an investment decision on.
Latitude Group Holdings Ltd (ASX: LFS)
Latitude is an ASX financial share that offers a number of products including credit cards, personal lending, white label capabilities for retailers, and so on.
The Latitude share price is down around 35% since June 2022. While volumes have increased, the business is also dealing with much higher funding costs. That's partly why the FY22 second half continuing cash net profit after tax sank 37% to $60.5 million.
Latitude is now also dealing with a cybercrime incident that has led to the details of millions of customers being stolen.
The company's trailing grossed-up dividend yield is 14.6%. However, the FY23 grossed-up dividend yield is only meant to be 10%, according to Commsec. But, if the company can get through this difficult period, the dividend could then bounce back to 11 cents per share in FY24, which would represent a grossed-up dividend yield of 13.5%.
Such times of difficulty could be a good time to consider an ASX 200 dividend stock like this. The company could grow over the longer term. But, it's not the sort of business I'd buy for my own passive income-focused portfolio.
Magellan Financial Group Ltd (ASX: MFG)
Magellan is a fund manager, but poor investment performance has meant that many investors have pulled out funds. This has resulted in lower funds under management (FUM), revenue, and earnings.
The last 12 months of dividends amount to a grossed-up dividend yield of around 18%. However, those payments were based on higher FUM. Magellan's FUM had dropped to $45.4 billion at 28 February 2023, with $0.8 billion of FUM outflows over the month.
Commsec estimates currently suggest the FY23 grossed-up dividend yield could be 12.7% and in FY24, it could be 9.4%.
In other words, at the moment, Magellan's dividend is expected to keep falling over the next few financial years.
If the ASX 200 dividend stock can turn its investment performance around for investors, then this could stop outflows and lead to growth of FUM, earnings, and dividends.
At this stage, I don't think Magellan is worth buying because outflows keep chipping away at the FUM.
