Fortescue Ltd (ASX: FMG) shares may be best known for iron ore mining, but it has also been a commendable passive income stock in the last few years, thanks to the strength of the iron ore price.
With a market capitalisation of $75.03 billion, according to the ASX, it's one of the largest miners in the world. This scale allows the business to deliver impressive profit margins compared to its smaller peers.
Interestingly, Fortescue shares usually trade on a relatively low price/earnings (P/E) ratio, partly because of how unpredictable the iron ore miner's earnings are. The lower P/E ratio enables a higher dividend yield.
What is the Fortescue dividend yield?
The dividend yield is decided by a combination of a company's dividend payout ratio and the P/E ratio.
In the FY24 half-year result, Fortescue's dividend payout ratio was 65% of net profit after tax (NPAT). The company's dividend policy is to pay out between 50% and 80% of underlying NPAT.
In my opinion, the next dividends are more important than the last ones declared because those old ones are history and not necessarily indicative of future payouts.
Broker UBS has projected owners of Fortescue shares could receive a dividend per share of $1.28 in FY25. At the current Fortescue share price, that would represent a grossed-up dividend yield of 7.5%, which is still quite high. This potential payout is lower than the predicted grossed-up dividend yield of 9.8% for FY24.
Owning 1,000 shares
Buying 1,000 Fortescue shares would cost more than $24,000. However, it would also potentially result in receiving $1,280 in dividend cash and grossed-up dividend income of $1,828 (when including the potential franking credits) for FY25.
If the iron ore price is stronger than expected, the net profit and dividend could be more significant than UBS predicted. However, if the iron ore price is weaker, it would hurt Fortescue's dividends and profit.
As a miner, its production costs don't typically change much month to month, so additional revenue (or weaker revenue) can lead to a significant change to net profit, which flows onto the dividend payments. Time will tell what happens next.
Fortescue share price snapshot
The chart below shows that the Fortescue share price is up around 20% in the past year. However, the ASX iron ore share has declined by approximately 17% in the year to date with the iron ore price falling from above US$140 per tonne at the start of the year to around US$107 per tonne now, according to Trading Economics.
