One of the best performers on the S&P/ASX 200 Index (ASX: XJO) on Monday has been the Fortescue Metals Group Limited (ASX: FMG) share price.
At one stage today the iron ore producer’s shares were up as much as 8% to a record high of $13.53.
When its shares reached that level, it meant they had gained a sizeable 25% since the start of the year.
Not bad when you consider that the ASX 200 is down over 18% during the same period.
Why is the Fortescue share price at a record high?
Investors have been buying the iron ore producer’s shares on Monday after the price of the steel making ingredient climbed higher on Friday night.
According to CommSec, the benchmark iron ore price rose by US$2.50 or 2.8% to US$93.25 a tonne. This brought its weekly gain to a solid US$4.80 or 5.4%.
Iron ore prices have been increasing thanks to solid demand in China and production disruptions from key Brazilian miners.
Pleasingly, analysts at Goldman Sachs appear confident that iron ore prices will remain solid for some time to come. They recently ruled out a crash in the base metal’s price.
What else is supporting Fortescue’s shares?
In addition to this, with the interest rates on offer with savings accounts and term deposits at ultra low levels, income investors have been attracted to Fortescue for its generous yield.
Especially given how countless dividend favourites such as Australia and New Zealand Banking GrpLtd (ASX: ANZ) have been deferring or even outright cancelling dividend payments during the pandemic.
According to a note out of Macquarie Group Ltd (ASX: MQG) on May 1, it expects Fortescue to pay a 73.3 cents per share dividend in FY 2021. This implies a 5.5% fully franked forward dividend yield.
While that is very generous already, I suspect that if iron ore prices remain at these levels for longer, Fortescue’s free cash flows will be strong enough to pay an even bigger dividend next year.
Overall, I think this yield and its positive outlook makes it worth considering Fortescue along with fellow mining giant BHP Group Ltd (ASX: BHP).
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More reading
- ASX 200 up 1.35%: Gold miners and Fortescue rocket higher, big four banks tumble
- Beat falling rates with these strong ASX dividend shares
- Are these China-exposed ASX shares in danger in 2020?
- Get paid huge amounts of cash to own these ASX dividend shares
- Goldman Sachs names 5 reasons iron ore prices won’t crash
Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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