Wednesday, February 9, 2022

Should You Dig Into This 5.8% Yielder?

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A 5.8% Yield That Will Be Volatile

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

Like many commodity-related companies, mining and oil giant BHP Group (NYSE: BHP) pays a variable dividend. And lately, that dividend has been large.

The company pays dividends semiannually. Its last dividend was $2 per share. Should investors expect to continue to receive $2 per share twice per year?

BHP Group mines copper, iron, nickel, coal and potash and drills for oil.

Unsurprisingly, the company's revenues are tied to the prices of the commodities it produces. When prices are high, revenue increases. When prices are low, revenue decreases.

Those rising and falling prices also have an impact on BHP Group's free cash flow, which grew significantly last year but is expected to decline in 2022.

BHP Group's Free Cash Flow
 

Keep in mind, the company still generates plenty to pay the dividend.

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Last year, it paid just below $8 billion in free cash flow. This year, BHP Group is projected to pay $8.2 billion, well below its expected free cash flow of $17 billion.

But with BHP Group's variable dividend policy, the payout is unpredictable.

BHP Group's Dividend Per Share
 

So BHP Group's dividend is simple to understand. It can afford its dividend right now with the prices of metals soaring, but the metals markets can be volatile. At some point, prices are likely to be lower. BHP Group's free cash flow will presumably follow them down. That should lead to a dividend cut since the dividend policy is variable.

Whether that occurs in the next 12 or so months is anyone's guess.

Dividend Safety Rating: C

Dividend Grade Guide
 

If you have a stock whose dividend safety you'd like analyzed, leave the ticker in the comments section.

You can also check to see whether we've written about your favorite stock recently. Just click on the magnifying glass in the upper right corner of the Wealthy Retirement homepage and type the company name in the box.

Good investing,

Marc

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