Could BHP Group Ltd (ASX: BHP) shares be a good way to diversify your dividends?

As a refresher, BHP is a giant resources business which has four main pillars. The key one is iron ore, but it also produces copper, petroleum and coal.

Are BHP shares a good option for dividends?

If you’re investing in income then it’s prudent to consider what the goal of that strategy is. Are you trying to get the biggest dividend income over the next 12 months? Or are you trying to build a portfolio of diversified businesses that will keep paying solid dividends over many years? For my own portfolio, I’d rather go for the picks that can keep paying dividends.

Does BHP fit into that group? Maybe.

When it comes to resource companies, they don’t have much pricing power over their respective commodities. If a competitor, such as Vale in Brazil, decides it’s willing to sell iron ore for a lower price than BHP then there’s not much BHP can do about that – and it mean less demand for its own iron. If Chinese iron ore demand falls then there’s not much BHP can do about that either.

The trajectory of the dividend should match the direction of a company’s earnings, in my opinion. It’s not very sustainable if a business keeps increasing its dividend payout (of profit) ratio in my opinion. If a business pays out more than 100% of profit as a dividend then it has eaten into the balance sheet to fund it. That’s dangerous if it’s done for multiple years.

Resource company profits are variable, so dividends are naturally volatile as well. Just look at the dividends of something like Woodside Petroleum Limited (ASX: WPL).

BHP’s diversification helps a lot here. Each commodity goes through cycle. BHP has several commodities, so there’s less risk of 100% of its commodities suffering simultaneously. The strength of iron ore has really helped during COVID-19.

In FY20 BHP’s continuing operating profit from its operations fell 11% to US$14.4 billion. The total dividend per share in FY20 was US$1.20, which was 10% lower than 2019. Not bad considering the big hit to coal and petroleum.

Summary thoughts

I think BHP could be one of the most reliable ASX dividend shares from the resource sector because of its diversification and commitment to shareholder returns. Using the trailing dividends in Australian dollars, it offers a dividend yield of 6.9%. Not bad at all.

But there are other ideas that have been much more reliable over the past decade that I’d go for first such as Brickworks Limited (ASX: BKW), APA Group (ASX: APA) or Magellan Financial Group Ltd 

(ASX: MFG).