Are Pilbara Minerals shares a buy for that 7% dividend yield?

Is Pilbara's 7% yield too good to be true?

Looking at the Pilbara Minerals Ltd (ASX: PLS) share price today, one thing might stand out to you, especially if you're an income investor. That would be Pilbara shares' stonking dividend yield.

The ASX 200 lithium stock was going for $3.47 a share at the close of trade yesterday. At this share price, Pilbara has a trailing dividend yield of 7.20% on the table.

Now, 7.20% is obviously a massive dividend yield for any ASX 200 share to possess. Heck, it even comes in above what all four of the major ASX bank shares are currently offering.

So does this yield make Pilbara shares a no-brainer buy today?

A woman has a thoughtful look on her face as she studies a fan of Australian 20 dollar bills she is holding on one hand while he rest her other hand on her chin in thought.

Image source: Getty Images

Should you buy Pilbara Minerals shares for that 7% yield?

At face value, this dividend yield checks out. It comes from the two dividend payments Pilbara Minerals made to investors over 2023, which was a first for the company.

The first of these payments was the March interim (and Pilbara's maiden) dividend worth 11 cents per share. The second is the final dividend from September worth 14 cents per share. Both dividends came with full franking credits attached.

That 2023 total of 25 cents per share works out to be worth a 7.17% yield at the current $3.48 share price.

However, as any good dividend investor knows, a company's trailing dividend yield does not guarantee any future income whatsoever.

There's absolutely nothing stopping Pilbara Minerals from halving or even eliminating its dividend for 2024 and beyond.

And I happen to think there's a strong possibility that this will happen.

A lithium dividend trap?

Like any commodity company, Pilbara's ability to fund dividends is almost entirely dependent on what it can sell its commodity for. A boom in lithium prices over 2022 and 2023 enabled the company to fund these bumper dividends. However, the back half of last year saw lithium prices dramatically come off the boil.

That's partially why Pilbara Minerals shares have lost so much steam in recent months, falling around 35% from more than $5.30 a share in August last year to the current levels.

Unless lithium prices rebound this year, it seems unlikely Pilbara will be able to fund those kinds of dividend payments again in 2024.

ASX broker Goldman Sachs would probably agree. Earlier this week, my Fool colleague James covered Goldman's recent sell rating on Pilbara shares. The broker gave the miner a 12-month share price target of $3.20 and stated the following:

With our view of ongoing supply pressure in the lithium market, and PLS recently outperforming peers despite near-term FCF [free cash flow] continuing to decline on lithium prices and increasing growth spend… we see PLS as relatively expensive on fundamentals, and downgrade to Sell.

So, all in all, I think Pilbara shares are a high-risk investment for dividend seekers today. There are simply more reliable dividend stocks on the ASX to choose from in my view.

Pilbara Minerals may still have a bright future ahead of it. But I wouldn't say it's a buy for dividend income today.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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