Hunting for passive income? Here's why I'm eyeing BHP shares

As a leading ASX 200 dividend stock, BHP shares offer a great path towards building a regular passive income stream.

Key points
  • BHP shares traditionally pay out two fully franked dividends each year
  • The ASX 200 miner’s dividend payments soared to all-time highs over the past two years amid rocketing commodity prices
  • While the March 2023 interim dividend was lower year on year, I believe the long-term outlook for BHP dividends remains strong

BHP Group Ltd (ASX: BHP) shares offer investors more than the potential for price appreciation.

As a leading S&P/ASX 200 Index (ASX: XJO) dividend stock, BHP shares also offer a great path towards building a regular passive income stream.

And if you're like me, you certainly won't object to dividend payments dropping into your bank account on a bi-annual basis.

Especially, fully franked dividends, which can come with some useful tax benefits at the end of each financial year.

A female employee in a hard hat and overalls with high visibility stripes sits at the wheel of a large mining vehicle with mining equipment in the background.

Image source: Getty Images

A few points before moving on

Before digging into investing in BHP shares for passive income, a few points for clarity.

First, there are a number of high-quality ASX 200 dividend shares out there to choose from.

To reduce risk, investors looking to secure passive income from dividends would do well to build a portfolio of those stocks across different sectors, rather than investing everything in a single company. The old 'all your eggs in one basket' mistake.

Second, when we're discussing dividend yields we're discussing trailing yields based on the past 12 months of payouts. The dividends that BHP shares (or any ASX company's shares) pay in future may well be higher or lower than what was paid over the past 12 months.

Third, the ASX 200 mining giant operates in a cyclical market, generating most of its revenue from iron ore and copper.

Some years, like the past few, will see BHP outperform amid rocketing commodity prices. In other years it may underperform when commodities come off the boil.

But, as long-term investors seeking to build a lifetime passive income stream, we can look past those ups and downs and forward to our eventual retirement with some handy dividend payouts to sweeten the pot.

With that said…

BHP shares for passive income?

BHP shares have a long track record of paying out two fully franked dividends per year. Even in the pandemic addled year of 2020.

The miner's final dividend notched all-time highs in 2021. And its interim dividend set a new record high in 2022.

Now those payouts are coming down from the stratosphere amid a retrace in copper and iron ore prices. But both metals remain key for global growth. Copper is vital in the world's push towards electrification. And iron ore is a core steel-making ingredient.

Whatever happens to those prices in the near and mid-term, BHP shares will almost certainly benefit when the metals surge higher again in the future.

With that said, both iron ore and copper are still trading at historically high levels. Iron ore is fetching right around US$120 per tonne and copper is above US$9,020 per tonne.

The copper price is growing more important to dividend payments from BHP shares as the miner moves closer to acquiring copper producer OZ Minerals Limited (ASX: OZL) for some $9.8 billion.

As for dividends, BHP paid a final dividend of $2.55 per share on 22 September. That was down from $2.72 per share in September 2021.

BHP recently paid an interim dividend of $1.36 per share on 30 March. That was down from $2.08 per share in March 2022.

With BHP shares currently trading for $46.55, the total 12-month dividend payout of $3.91 works out to a trailing yield of 8.4%.

BHP also offers a dividend reinvestment plan (DRP) for interested investors. If you don't need the passive income right away, this can be a great way to put the power of compounding to work for you.

And don't forget, BHP has already stumped up 30% in corporate taxes on the profits it's sharing out with investors. Meaning you'll get credit for that from the ATO, helping bolster that passive income.

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. 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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