A consistent flow of passive income is the end goal for many investors.
So if you saw an ASX dividend stock paying out a 21.52% yield representing a $6.7 billion company, you have to at least have a think about it, wouldn't you?
After all, that means a $100,000 investment would grant you $22,000 of passive income each year.
How amazing is that!
Believe it or not, there is such a stock trading on the ASX at the moment.
So is Yancoal Australia Ltd (ASX: YAL) a legitimate investment for investors looking for passive income?
Is there some trick with this 21.5% yield calculation?
Firstly, let's set the record straight about this unbelievable dividend yield.
As far as I can see, there is no catch with this 21.5% payout.
In March this year it paid out 70 cents per share, while September saw a 37 cent dividend. That adds up to $1.07 for the year, which is in excess of one-fifth of the current share price hovering just above the $5 mark.
The yield isn't at that level because of a massive one-off special distribution. Nor was the timing of its interim and final dividends changed so that three payments ended up in the last 12 months.
And Yancoal is not a microcap company. It's a coal production business with a market capitalisation in the billions running productive mines.
The incredible payout is real cash in its investors' hands.
Here's the catch with Yancoal
You know there is a "but" coming though.
The trouble with Yancoal is that, like any resources company, its fortunes are highly cyclical.
Coal, as a fossil fuel commodity, is especially subject to volatility in global prices.
For example, as recently as September 2020 coal prices sank below US$50 per tonne as COVID-19 lockdowns depressed economic activity and the world transitioned to net zero.
But all that had completely turned around last year after Russia invaded Ukraine, causing the market to ditch environmental concerns in return for energy security.
By September 2022, as the northern winter approached, the global coal price hit US$439. That's almost 10 times what it was just two years before.
Unsurprisingly, Yancoal's ability to pay phenomenal dividends very much correlates to coal prices.
As mentioned, this year it handed out $1.07, and last year it did even better with $1.23 as energy prices rocketed. But Yancoal paid no dividends in 2021, and managed only one 21 cent payment in 2020.
This inconsistency means that if you buy Yancoal shares now for its 21.5% dividend yield, you could be sorely disappointed. There is absolutely no guarantee you will receive that passive income in 2024.
So for me, I would prefer to sacrifice some yield for more certainty over whether the yield can be maintained.
Of course, past performance is never an indicator of the future. But there are a bunch of ASX shares that have historically increased their dividends, which could form a much more solid core for your income portfolio.
Here are three for example, and one is paying a 17.7% yield.
