Looking at Yancoal Australia Ltd (ASX: YAL) shares today, no doubt one metric will jump right out at you above all others – the ridiculous dividend yield.
Yesterday, Yancoal shares closed at $5.30 each, up 0.19% for the day. At that share price, Yancoal seemingly has a dividend yield of… wait for it… 20.19%.
That immediately might be ringing alarm bells out there, as it should. After all, a 20.19% yield is highly uncommon on the ASX – at least for companies that don't prove themselves to be dividend traps. Even the most generous ASX dividend payers – the likes of Westpac Banking Corp (ASX: WBC) or BHP Group Ltd (ASX: BHP) – rarely offer dividend yields above 10%.
So 20.19% is certainly something you don't see every day.
Therefore, we'd better ask the million-dollar question: Is this dividend yield 'legit'? Or is there something wrong with Yancoal shares that should deter income investors from this siren song?
Is Yancoal's 20% dividend yield too good to be true?
Well, Yancoal's 20.19% dividend yield isn't a mirage. Back in April, this ASX coal share forked out an interim dividend worth 70 cents per share. Earlier this month, the company announced that its final dividend for 2023 would come in at 37 cents per share.
Together, these payments come to a total of $1.07 per share. Plugging that into the last Yancoal share price of $5.30, and we indeed get a divine yield of 20.19%.
So that's all well and good, and Yancoal investors have certainly reaped the rewards when it comes to dividend income over the past year or two.
But the past doesn't mean much in this context. I'm sure most readers are more interested in whether they can secure a 20%-plus yield going forward.
Well, that's a difficult question to answer. For starters, no ASX dividend-paying share is under any obligation to maintain its dividends from year to year.
There's nothing stopping Westpac, BHP, or Yancoal from doubling, halving, or eliminating their dividend payments over the coming 12 months. Put simply, a company can do as it darn-well pleases.
Of course, most companies like to reward their shareholders by paying out the highest dividends possible.
But that's where we get to the potential fly in the ointment with Yancoal. See, Yancoal is, well, a coal share. This means that, like every other resource stock out there, this company's profits (and thus the ability to pay out dividends) are entirely dependent on the global price of coal in any given year.
Passive income: Feast and famine
Over the past year or two, Yancoal has enjoyed record-high coal prices, thanks in part to the war in Ukraine, and other factors such as supply-chain bottlenecks and inflation.
That's why we've seen monstrous, record-smashing dividends from the likes of Whitehaven Coal Ltd (ASX: WHC), New Hope Corporation Limited (ASX: NHC), and other ASX coal and energy shares.
But high prices don't last forever. And when the inevitable downturn comes around, you can be fairly sure the lofty dividends will dry up pretty quickly. We've seen this story play out in the past. Sure, investors are on track to enjoy a highly lucrative $1.07 dividend per share from Yancoal in 2023 after bagging a whopping $1.23 in 2022.
But keep in mind that back in 2019, when coal prices were a lot lower, shareholders received an annual total of 38.9 cents per share from their Yancoal stock. In 2020, it was even lower at 21.2 cents per share, and in 2021, well, Yancoal didn't even pay a dividend. At all.
So there's nothing wrong with Yancoal shares – that 20.19% yield is real. However, Yancoal is your classic 'feast or famine' dividend stock. The good times are rolling right now. But they won't forever.
