Fortescue Metals Group Ltd (ASX: FMG) shares have built a reputation for paying large amounts of passive income to shareholders. Investing a five-figure sum could unlock hundreds, or even thousands, of dollars of dividends for investors.
The ASX mining share has been making billions of dollars of net profit after tax (NPAT) over the last few years thanks to its iron ore mining operations and a good commodity price.
Fortescue has a policy of maintaining a dividend payout ratio of between 50% to 80%. It also contributes 10% of its NPAT to its green energy division, Fortescue Future Industries (FFI).
When combining a generous payout ratio with a low price/earnings (P/E) ratio, it can create an exciting dividend yield.
How much passive income will Fortescue shares pay?
It's anyone's guess what iron ore prices are going to do in the coming months or years, but the business is expected to keep making good profits in the shorter term at the current iron ore price.
Estimates on Commsec suggest that the ASX mining share could pay an annual dividend per share of $1.90 in FY23. This would represent a grossed-up dividend yield of 14%.
Then, in FY24, it could pay an annual dividend per share of $1.31, which would translate into a grossed-up dividend yield of 9.7%.
Projections are not guaranteed though. If the iron ore price sinks then the Fortescue passive dividend income could be lower than expected. Alternatively, Fortescue's payout could be bigger than projected if the iron ore price soars.
What would a $10,000 investment unlock in dividends?
The last five years have demonstrated significant volatility for the Fortescue share price, dividend and net profit.
So, for our passive income calculation, I'll utilise the more conservative FY24 lower payout.
Investing $10,000 would allow us to buy 517 Fortescue shares. In the 2024 financial year, this investment would pay a total of around $677 cash dividends, as well as approximately $290 franking credits, for a total of around $967 grossed-up passive dividend income.
Will Fortescue be able to keep paying large payouts?
An annual payout of $1.31 per share would be less than FY22 and FY20, so it's not a huge projection.
If the iron ore price stays around US$100 or higher, then the good dividends could keep flowing. The Chinese economy could yet surprise on the positive side.
There are various demands on Fortescue's capital which could limit future dividends, including decarbonising the mining operations and growing FFI. However, Fortescue recently started producing high-grade iron (and cash flow) from Iron Bridge, which should help earnings. Plus, there are various ways it could get funding for FFI from the US government, the Australian government and/or bring on external investors.
