Please ensure Javascript is enabled for purposes of website accessibility

Is Companhia Siderurgica's Dividend Safe for Your Portfolio?

By Blake Bos - Jul 9, 2014 at 10:01AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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

Today we'll look at a Brazilian steel producer Companhia Siderurgica (SID 2.83%) 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.


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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Companhia Siderúrgica Nacional Stock Quote
Companhia Siderúrgica Nacional
$3.27 (2.83%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.