Looking at Whitehaven Coal Ltd (ASX: WHC) shares today, one metric will probably jump out at most investors, particularly those seeking passive dividend income. That's Whitehaven's monstrous dividend yield.
The Whitehaven share price closed down 0.14% yesterday at $6.98. At this price, Whitehaven shares boast a whopping trailing dividend yield of 10.18%.
What's even more impressive is the ASX coal share's last two dividends that this yield is derived from came will full franking credits. That means this 10.18% yield grosses up to a head-turning 14.62% with that full franking.
However, all good investors are well-versed in being cautious about anything that looks too good to be true. And a dividend yield of 10.18% certainly makes a case for this classification.
So today, let's discuss whether buying Whitehaven shares right now for this 10% yield is worth the risk.
Is Whitehaven's 10% dividend yield too good to be true?
To start with, it is worth pointing out how this 10.18% yield checks out. It comes from Whitehaven's last two dividend payments. The first was the September final dividend of 40 cents per share that we saw last year. The second was the interim dividend of 32 cents from March earlier this year.
But let's backtrack a little further. These massive dividend payments have been a direct consequence of sky-high coal prices that Whitehaven has been able to enjoy over the past year or two.
According to Whitehaven itself, coal was priced at just over US$200 a tonne in early 2022 before the Russian invasion of Ukraine. But over the six months to 31 December 2022, Whitehaven was able to realise a historically high average selling price of US$552 per tonne.
Of course, Whitehaven is a commodities-based company. As such, it has no influence on the price it is able to sell its own products for and is entirely at the mercy of commodity markets. Thus, while the company might be able to rake in monstrous profits when there is a commodity upswing, it must also weather any falls as well.
This inherently means that Whitehaven's profits (and dividends) are almost entirely dependent on the whims of the markets.
Whitehaven shares haven't always paid big yields
To put things in perspective, let's discuss Whitehaven's dividend history. Sure, the company has delighted investors with these massive dividend payments totalling 72 cents per share over the past 12 months. But before that, the company's dividends look comically small by comparison.
Whitehaven's February interim dividend from 2022 came in at just 8 cents per share (unfranked). And, after skipping dividend payments entirely over 2021 and the back half of 2020, the next dividend payment we can look at is the February 2020 cheque of 1.5 cents per share.
Looking at this data, I conclude that Whitehaven's gigantic dividends from the past 12 months are probably something of a one-off and not an indication of what the company will consistently pay out going forward. As such, I would not be investing in this company today.
To be sure, Whitehaven might have another big dividend coming investors' way later this year. We'll find out exactly how much shareholders are in store for when Whitehaven reports its full-year earnings on 24 August. This might well see the company announce another big dividend.
But I'd rather search for more consistent dividends that aren't completely dependent on coal prices somewhere else.
