Consensus FTSE 100 the dividend yield is 3%. Mining giant BHP Group (LSE: BHP) has a dividend yield of 10%. With that in mind, should I buy stocks for my portfolio in order to earn passive income?
Giant of the FTSE 100
BHP is one of the largest mining companies in the world. With a rich history dating back to 1885, the Melbourne-based company produces and sells a variety of commodities. These include iron ore, coal, copper and uranium. It has a truly global reach, operating in 90 countries with around 80,000 employees and contractors on its books.
As of this writing, BHP shares are trading at 2,101 pence per share. Around the same time last year, shares were trading at 1,719 pence per share. Over the past 12 months, its share price has risen 22%. More importantly, current levels have been dropping in recent weeks. BHP’s share price is down 12% from mid-August, when it traded at 2,358 pence per share.
I think the fall in the BHP share price is due to a few factors in BHP’s final results, which were announced last month. First, it announced a major restructuring that would allow it to sell its petroleum division as part of a merger with Woodside Oil and refocus elsewhere. It will mean short term pain in terms of lost income, but it could mean long term profits as it focuses on other areas such as iron ore. It has also decided to remove its double listing on the London and Sydney stock exchanges.
BHP’s stock price fell as a result of these announcements, but I personally don’t think that’s a bad thing. I think BHP will be a leaner, more efficient business. Also, I think at its new price it’s a good opportunity for the FTSE 100 to acquire some cheap stocks.
BHP’s annual results have been impressive. The growing demand for iron ore (especially in China), coupled with a supply disruption, has benefited BHP. Revenue increased 80% to $ 25.9 billion from the previous year. In turn, profits rose 42% and the balance sheet received a cash injection.
This cash injection enabled BHP to reduce its debt and announced the payment of a dividend of $ 2. The full-year dividend payment reached $ 3, which is a new record for BHP. Some of my top picks from the FTSE 100 pay good dividends and they are good additions to my portfolio because they help me generate passive income.
Risk and reward
I don’t believe BHP’s recent impressive results are sustainable. BHP benefited from increased demand and prices for iron ore, especially in China. China recently introduced government-imposed reduction targets. This will affect BHP in my opinion. With the recent abandonment of its oil business, its dependence on iron ore will be stronger and if the current growth rate cannot be sustained, its profits will be affected.
Then the dividend yield is higher than the consensus of the FTSE 100, but it is not guaranteed. BHP has a habit of canceling its dividend, namely in 2016 and 2020. If that happened again, I would not earn passive income from the shares I bought.
Overall, I like the BHP group and think it’s a good option for my wallet. With the recent drop in the stock price, I believe there is an opportunity to acquire some cheap stocks and would be happy to add some to my portfolio.
Jabran Khan has no position in any of the stocks mentioned. The opinions expressed on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of ideas makes us better investors.