This FTSE 100 stock pays income of 10%!

Paul Summers highlights the huge dividends on offer from this FTSE 100 (INDEXFTSE:UKX) stock. Is the income worth the risk?

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I don’t have to look far for FTSE 100 stocks offering massive dividends at the moment. Actually, the number will have gone even higher after yesterday’s market wobble. There is one company, however, that catches my eye more than most. Its dividend yield stands at 10%!

Record production

BHP Group (LSE: BHP) is one of the world’s top producers of iron order and copper. It also has interests in nickel, zinc, coal, potash, oil and gas. As one might expect from all that, it’s also one of the biggest companies in the FTSE 100.

In today’s operational update, CEO Mike Henry said that the company had hit production records at its iron ore operations in Western Australia and its coal mine in Queensland. Annual copper production at the Olympic Dam project in South Australia also rose to its highest level since it was snapped up the asset 16 years ago. 

In addition to this, BHP also said that it had “brought on four major projects safely, on schedule and on budget” over the last year. This should mean that BHP is even better placed to profit from the huge need for metals over the next decade. Renewable energy sources, electric vehicles and increased urbanisation — all of these so-called ‘megatrends’ will require its help. This is one reason why I would buy BHP today. The other is the dividends.

FTSE 100 dividend demon

Despite being a rocky ride at times, BHP shares have rewarded long-term investors. Anyone buying five years ago would be sitting on a gain of 136%. In the last year, the FTSE 100 member’s valuation has increased 21%. 

Naturally, we’re just talking about share price gains here. If the dividends distributed to shareholders throughout this time were included, the result would be even better thanks to compound growth.

Right now, the consensus forecast is that the mining giant will return 220p per share for FY21 (according to Stockopedia). Using today’s share price, that becomes a mammoth yield of 10%. For comparison, even the best instant access Cash ISA pays out just 0.5%, according to Moneysavingexpert.com.

However, no investment case would be complete without a sober consideration of risks that come with investing in BHP. 

No sure thing

Perhaps the most apparent of these is the volatility in commodity prices. This means that BHP’s share price is ultimately determined by something it can’t control. That’s true of many companies but it’s something prospective investors like me would need to feel comfortable with. As a litmus test, I’d look at the share price graph. Would I have been able to sit on my hands between 2011 and 2016 when the shares tanked?

The cyclical nature of mining also means that dividends can never be guaranteed. In fact, last year showed that payouts can be the first things to be cut by any company when times get tough.

Even if they’re not wiped or suspended, they can vary from year to year. Obviously, I’d also prefer a company to be hiking its cash returns annually. Unfortunately, that’s not been the case with the FTSE 100 miner. The general direction has been up but there’s been some variability along the way.

This being the case, I think it’s vital that I invest in a number of stocks from other sectors to give myself a better probability of growing my income stream over time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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