Should you buy Fortescue shares for that fat 8% dividend yield?

More than one expert reckons Fortescue's dividends are looking shaky.

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It hasn't been a great day for Fortescue Ltd (ASX: FMG) shares so far this Tuesday. At present, the Fortescue share price has fallen by 0.46%, leaving it at $25.93 a pop. This drop for the ASX 200 iron ore miner is even more than what the broader market is currently suffering, with the S&P/ASX 200 Index (ASX: XJO) presently down 0.32%.

But this share price drop, while likely unwelcomed by shareholders, has given Fortescue shares a boost to their dividend yield.

As any good investor knows, when a company's shares go down, the trailing dividend yield you can buy them on rises. After today's drop, the current dividend yield on Fortescue shares is sitting at a whopping 8.02%.

With Fortescue's dividends typically coming with full franking credits attached, this trailing dividend yield grosses up to an even more impressive 11.46%.

But good dividend investors also know that a company's dividend yield always reflects the past not the future. So are Fortescue shares a buy for this 8% fully-franked dividend yield today? Or is this a classic case of a dividend trap that investors should avoid?

Should you buy Fortescue shares for that 8% dividend yield?

All ASX shares that pay dividends are inherently unpredictable when it comes to future income. That's because no company is ever under any kind of obligation to fund a dividend. Let alone keep it at last year's levels. It's at the complete discretion of a company's management to decide what kinds of dividends they pay out and how frequently.

However, in Fortescue's case, the dividends are even more unpredictable than your average ASX dividend share. That's because Fortescue, as an iron ore miner, is a highly cyclical stock. The company's profitability rests almost entirely on the price of iron ore at any given moment. That's completely out of Fortescue's control, of course.

To illustrate this in action, Fortescue shares went from paying out an annual dividend of 23 cents per share in 2018 to a whopping $3.58 per share in 2021 after the price of iron ore went through the roof. 2023 saw the company pay out less than half of what it did in 2021, with an annual total of $1.75 in dividends per share.

But what about the future? Well, it looks as though this cyclicality in the Fortescue dividend will continue if a recent analysis from ASX broker UBS is to be believed.

ASX brokers predict dividend drought

As my Fool colleague covered earlier this month, UBS is forecasting some wildly different dividend yields that will stem from Fortescue over the coming years. For example, UBS is predicting that Fortescue is currently on a forward, grossed-up dividend yield of 7.1% for FY2025. But this falls to 5.3% for FY2026 and just 4.5% for FY2027.

That implies a lot of dividend cuts are on their way to Fortescue investors.

Unfortunately for Fortescue bulls, another ASX broker in Goldman Sachs is currently holding similar sentiments. Goldman has recently given the Fortescue share price a 'sell' rating, alongside a 12-month share price target of $16.90. That would see investors lose close to a third of their investment capital from today's pricing if accurate.

Goldman argues that Fortescue's ambitious plans to decarbonise its operations and expand production and use of green hydrogen "reduces the dividend payout ratio from the current ~65% in 1H FY24 to ~50% from FY25 onwards (bottom end of the 50-80% guidance range)".

So it seems that at least these two ASX experts are united in expecting reduced income from Fortescue shares going forward. No doubt investors hoping for an 8% return on their cash today will find these assessments bitterly disappointing. But we'll have to wait and see what happens.

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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