The ASX mining share Fortescue Metals Group Ltd (ASX: FMG) is the stock in my portfolio that has the largest dividend yield.
I'm invested in a number of different ASX dividend shares – I like passive income, but I'm looking for businesses to deliver good capital growth as well.
At the various times that I've invested in Fortescue shares, the share price has been lower than it is today. The business has paid me a lot of dividend income since I invested, which I expect will continue, at least in the short term.
Low price/earnings ratio
As an iron ore miner, the Fortescue share price seems to regularly trade on a low price/earnings (P/E) ratio. For whatever reason, the market doesn't seem to place a high value on Fortescue's earnings, meaning that it is valued at a low multiple of its earnings.
The lower the P/E ratio, the more this pushes up the dividend yield for the ASX share.
According to Commsec, the Fortescue share price is valued at less than 11 times FY24's estimated earnings.
The earnings multiple and profit generation are just part of the picture – the board also has to decide how much capital to send to shareholders.
Dividend payout ratio
There are a lot of competing demands on Fortescue's money right now. Shareholders want a good dividend, management wants to invest in green energy, and the company needs to maintain a good balance sheet. The dividend payout ratio can have an important influence on the yield.
Fortescue paid out 65% of its net profit to investors in FY23, with an annual dividend per share of $1.75. At the current Fortescue share price, that translates into a trailing grossed-up dividend yield of 11.8%.
Commsec numbers suggest that the ASX share could pay an annual dividend per share of $1.12. At the current Fortescue share price, the forward grossed-up dividend yield could be 7.5% for FY24.
Foolish takeaway
Many of the ASX dividend shares in my portfolio have much lower dividend yields, which doesn't necessarily mean they're better or worse than Fortescue, but it's interesting to know.
As Fortescue invests more in green energy, both the dividend payout ratio and dividend yield may come down. But, if the iron ore earnings hold up then it could continue paying a large dividend yield for years to come.
