Passive income is usually one of the best reasons to own large ASX iron ore shares. At the current BHP Group Ltd (ASX: BHP) share price, it's definitely worth asking if the ASX mining share is a buy.
As the chart below shows, the company has made a recovery over the past few months. While that's a good thing for existing shareholders, but it means a lower dividend yield for prospective investors.
For example, if a business has a 5% dividend yield and then the share price rises 10%, the dividend yield becomes around 4.5%. In the last five months, the BHP share price has grown by 15%, which is a headwind for yield hunters.
I'll run through my views on the positives and negatives of investing for passive income.
Positives
BHP offers investors pleasing commodity diversification across iron ore, copper, steelmaking coal and energy coal. By generating earnings across a variety of sources, it's able to provide investors with more profit stability than a resource business focused on a single commodity.
A somewhat stable profit means the business can provide fairly stable dividends for owners of BHP shares.
The broker UBS is expecting virtually the same dividend from BHP in FY26, FY27 and FY28. While growth would be preferred, stability could be valuable in the next few years (if that's what happens). UBS suggests the ASX mining share could pay an annual dividend per share of US$1.13 in FY26.
The projection translates into a potential grossed-up dividend yield of 5.9%, including franking credits.
I like the company's efforts to expand its copper exposure, although its final attempt to engage a takeover of Anglo American was unsuccessful. It looks like copper has a pleasing long-term outlook with rising demand with expanded electricity grids, more electric vehicles, more smart devices and so on. Supposedly, it's likely to become harder to find high-quality copper deposits, which could be supportive for copper prices.
The ASX mining share's efforts to expand into potash – in what's seen as a greener form of fertiliser for the agriculture sector – could also help diversify and grow earnings.
Negatives
Firstly, whilst it isn't that much of a negative, the strength of the BHP share price has led to a lower dividend yield than it otherwise would have been if it hadn't risen by more than 10% in the last six months.
Given how cyclical resource prices can be, it could be wise to wait to buy when valuations are weaker rather than stronger, in my view.
I'm more cautious on the outlook for ASX iron ore shares when the valuations go higher because of how the new Simandou project in Africa could lead to pressure on the iron ore price due to the additional, significant supply it will add. Time will tell how much it weighs on profit, dividends and the BHP share price.
Samarco costs are another headwind for the business as BHP compensates people affected by the dam failure in Brazil. The business is expecting cash outflows in FY26 to be approximately US$2.2 billion and then in FY27 the cash outflow could be US$0.5 billion. These payments are negative for how much money BHP has to pay its dividends.
Foolish takeaway
At the current BHP share price, it could provide investors with solid passive income. However, there could be an even more appealing valuation on offer in the coming months or years.
