If you've been banking on ASX 200 mining shares for consistent dividends, some experts say that you might want to reconsider.
The mining majors – names like Fortescue Ltd (ASX: FMG), Rio Tinto Ltd (ASX: RIO), and BHP Group Ltd (ASX: BHP) just to name a few – have been dividend powerhouses in recent years as commodity markets have rallied.
But changes are in the air. The commodity price wave – producing a swell larger than Bondi – is impacting these mining giants.
And that could spell trouble for dividend-reliant investors. Let's see what the experts are saying.
ASX 2000 Mining shares: reliable for dividends?
Historically, Australians have heavily invested in ASX 200 mining shares through superannuation or direct holdings in their brokerage accounts.
In 2022 and 2023, commodities, in general, entered into a bull market.
The diversified iron ore giants like BHP and Rio Tinto generated massive profits, paying out many billions in dividends to their shareholders.
But markets – especially commodity markets – move in cycles, and we are now in a down phase of the cycle in many segments, including iron ore, copper and lithium.
According to The Australian Financial Review, Owen Analytics said that relying on ASX 200 mining shares for dividend income is "going to be a bit problematic" because of this.
For instance, BHP and Fortescue decreased their dividends by 10% and 12% this year, respectively.
This is despite the former reporting revenue and profit growth last year.
The culprits?
One of the main drivers is the falling iron ore price. In January, iron ore peaked at US$144 per tonne and now trades at US$91.5 per tonne.
Bank of America analysts predict the iron ore price may fall below US$80 a tonne, which could force miners to reduce supply or close higher-cost operations.
Furthermore, this is beyond the control of any of the ASX 200 mining shares. Such is the risk of owning mining stocks and expecting regular, stable dividends.
Those at Kearney Group suggest sticking to companies that are throwing off plenty of cash in the dividend-decision tree. Per the AFR:
The key to generating a high-yielding portfolio is to identify companies with strong free cash flows, as this enables them to return capital to investors via higher dividends, special dividends, and share buybacks.
Is there still upside potential for ASX 200 mining shares?
While dividends may be under pressure, on a long-term basis, some brokers still see upside in ASX mining shares.
For instance, Morgan Stanley upgraded BHP to a buy rating this week, with a price target of $47.50 apiece. At the time of writing, this implies around 18% upside potential.
Similarly, Goldman Sachs is also bullish on BHP, giving it a price target of $48.80, indicating an upside of over 21%.
But for those seeking yield, experts suggest looking beyond the mining giants alone.
Foolish takeaway
With commodity prices on a downward trajectory, relying on ASX 200 mining shares for steady dividend income could become increasingly risky.
Experts suggest looking at a broader cross-section of the market, not just in the mining and resources space.
