Were it not for its tantalising, fully franked dividend, shares of BHP Billiton Limited (ASX: BHP) could be sitting well below their current price of $24.68.
In the 2015 financial year (FY15), the mining heavyweight paid the equivalent of AU 168.6 cents in dividends per share, up nearly 29% compared to the prior year thanks to the falling Australian dollar (BHP announces its dividends in US dollars).
To add to that, BHP Billiton has what is called a 'progressive dividend policy', under which the miner has promised to increase, or at the very least maintain, its semi-annual dividend distributions. Despite the commodities crash, the miner reaffirmed its commitment to the policy at its full-year earnings presentation in August this year, providing investors with a huge boost in confidence.
Indeed, at its current price, BHP's shares are trading on a 6.8% fully franked dividend yield. That kind of yield from a blue-chip corporation is nearly unheard of, even putting the 5.5% and 5.7% returns on offer by Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS), respectively, to shame.
For local investors who can take advantage of the franking credits that come attached, BHP's yield balloons out to an even more impressive 9.7%.
Is it worth it?
In an environment where you'd be lucky to earn a 3% return on cash, BHP's dividend yield is compelling. It's also likely one of the reasons why the miner's shares haven't fallen even further – as the share price falls, the yield increases which attracts more buyers.
Unfortunately however, there is so much more to buying shares in a company than simply assessing its dividend yield. Determining the strength of the underlying business is extremely important, as is the assessment of the overall health of the industry in which the company operates.
BHP Billiton is facing a number of headwinds. Commodity prices remain depressed while Chinese growth is waning, which could see conditions worsen further. In the latest financial year, BHP Billiton even paid out more in dividends than it made in earnings which is not a sustainable practice in the long term.
I'm not forecasting BHP Billiton's doom, but I'm not confident that the business presents as a reasonable buy today, either. If you're looking for sound dividend investment opportunities, you may want to look at companies like Retail Food Group Limited (ASX: RFG) or Telstra instead – although they mightn't yield as much, I believe they'd be safer investments for the long run.
