I'd buy BHP shares to generate $1,000 of monthly passive income

I think it's a good time for long-term dividend investors to invest in BHP shares.

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Three mining workers stand proudly in front of a mine smiling because the BHP share price is rising

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The BHP Group Ltd (ASX: BHP) share price dropped almost 4% over the past year, underperforming the S&P/ASX 200 Index (ASX: XJO) which rose by 6.8% during the same period.

This underperformance extends over the longer term as well. Over the last five years, BHP shares have gained 5.5%, whereas the ASX 200 has increased by 14.6%.

The primary reason for the share price decline is the drop in global commodity prices, particularly for BHP's key metals: iron ore and copper.

Iron ore prices fell from US$144 per tonne in January 2024 to below US$100 per tonne in April 2024 due to ongoing weakness in China's property and industrial sectors. While prices have recovered somewhat, the current price is around US$108 per tonne, down 25% from its peak.

Copper prices also took a breather after reaching near-record highs of US$10,890 per tonne in May 2024 and are now trading at US$9,483 per tonne.

BHP shares offer a fully-franked dividend yield of 5.44% at the current share price. Considering the tax benefits from franking credits, this translates to generating an additional $1,000 of monthly passive income (before tax) by investing less than $180,000 today.

Dividend history

While BHP's current dividend yield is attractive, its value hinges on the consistency of its dividend payments. Let's review BHP's dividend payment history.

Dividend per share (AUD)Franking
FY13$1.20100%
FY14$1.31100%
FY15$1.69100%
FY16$0.40100%
FY17$1.06100%
FY18$1.59100%
FY19$1.92100%
FY20$1.75100%
FY21$4.03100%
FY22$4.63100%
FY23$2.61100%
TTM$2.35100%

Like any mining stock, BHP's earnings are subject to commodity cycles, which can significantly impact its dividend payments. For instance, in FY16, the dividend per share dropped sharply from $1.69 to 40 cents and took three years to recover to its previous high.

However, long-term shareholders who held onto its shares through the ups and downs of mining cycles have generally seen their dividends grow over time.

All this time, BHP has offered 100% franking credits on its dividend payments, which is an added bonus for tax-conscious investors.

Valuations

No matter how high the dividend yield might be, it's equally important to protect your invested capital. Watching the share price decline after purchasing is never a pleasant experience.

Let's examine BHP's current valuations using FY25 estimates from S&P Capital IQ. At present, BHP shares are valued at:

Note that the historical trading range excludes FY16 valuations, which appear to be outliers, with a P/E ratio as high as 53x and a P/B ratio of 8x.

Compared to BHP's usual trading ranges, some may argue that the current P/B ratio suggests a potential downside. Economic uncertainties always loom, so it's crucial to consider the risks involved.

But, all things considered, I can safely say that BHP's valuation multiples are near or below their mid-points in terms of PER and PBR.

Foolish takeaway

For long-term dividend investors, I think BHP's current share price offers a compelling opportunity. As a global leader in an essential industry with a consistent dividend history, BHP provides attractive dividend yields at reasonable valuation multiples.

Motley Fool contributor Kate Lee has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. 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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