Is Companhia Siderurgica's Dividend Safe for Your Portfolio?

High yields are tempting today, but a closer look is required at SID.

Jul 9, 2014 at 10:01AM

Today we'll look at a Brazilian steel producer Companhia Siderurgica (NYSE:SID) to show investors how to quickly check if a company's dividend is safe. In today's interest rate environment, it can be all too tempting to look for stocks with a high dividend yield and invest in them for that yield. What investors need to understand is that chasing high yields can be very dangerous. It's of the upmost importance to make sure the yield is sustainable and those dividends won't disappear.

Foreign dividends are really confusing
A quick search on the popular finance websites and investors will find dividend yields for Companhia ranging from 3.83% all the way to 7.20%. What the heck is going on here, are these finance sites all wrong?

Unfortunately most of the data investors see on finance websites is populated by computer programs, as these sites cannot afford to have human beings double check every single stock in the market. This proves to be more problematic with shares of foreign companies especially, and generally results in incorrect dividend yield calculations. 

If an investor is looking at a foreign company with a dividend, they should always calculate the dividend yield themselves and look at how sustainable the company's dividend policy is.

What's happening with Companhia Siderurgica's dividend?
Looking at the company's cash flow statement, investors can see that it has paid out approximately $787 million in dividends to common shareholders over the past 12 months. This amount divided by the company's market cap equals a dividend yield of 11.6% over the past four quarters. 

This 11.6% yield assumes an investment that is made today, and the company will continue paying dividends equal to what they did over the past four quarters. 

Where most investors get led astray is by assuming the company will continue paying dividends at an equal rate in the future. Looking at the Compnahia's dividend payments since 2009, they've ranged from about $1.2 billion in 2009 to $585 million in 2012. That's a far cry from a consistent dividend.  

Since the company is based in Brazil, and the country is not taxed on dividend income, investors would only have to pay taxes at their domestic rates. When investing in a foreign company always be sure to look up its home country's dividend tax rate, as dividends will be taxed first at that rate and then again at the investor's domestic rate. This so-called double tax can have a profound effect on the net yield of the investment.

Why huge dividends are huge red flags
Whenever you see a rather large dividend, it's extremely important to see why the dividend is so large and if it is sustainable. If a company has a high dividend yield it usually means that the stock market is neither optimistic about the company's future, nor the sustainability of its dividend. 

While this task may seem daunting, it's relatively painless and can save investors from making poor decisions. In the video below, Motley Fool analyst Blake Bos will go through Companhia Siderurgica's dividend, and let investors know exactly why he thinks it is in severe trouble. He'll also walk investors through his process step by step, so they can evaluate all of those high-yield dividends that are so often traps.

Companhia Siderurgica's dividend may be in trouble, but these are built to last
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

  

Blake Bos has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers