Like a lot of investors, I appreciate the passive income streams I can get from dividend shares. Lately, I have been looking at a share that has a dividend yield of 19%. I must admit I have been sorely tempted to add this high yield share to my portfolio. But I decided not to – here I explain why.
Iron ore producer
The share in question is Ferrexpo (LSE: FXPO). This name may not be familiar, as it is an iron ore producer that sells to other industrial companies. However, on paper, the company’s figures look like the stuff of investor dreams.
Not only is the yield closing in on 20%, the company trades on a price-to-earnings ratio of less than two. That makes this firm look extremely cheap.
However, investor dreams can sometimes collide with reality in costly ways. Ferrexpo’s output is concentrated in a single area… in Ukraine. Its already high yield has increased as the price crashed due to the war with Russia. The Ferrexpo share price has lost half its value in the past 12 months.
So the 19% yield reflects significant investor concern about the risks involved here.
Resilient production
Has the sell-off been overdone? A lot of investors feared that war in Ukraine would hit Ferrexpo’s activities hard. Its lack of geographic diversification means that its fortunes are tied to what happens domestically.
But last week, the company announced that its first quarter production volumes fell only 2% compared to the equivalent period last year. While the company is currently unable to use its normal Black Sea port, it has managed to ship output to Europe by rail and barge.
Those results are strong and suggest that, for now at least, Ferrexpo’s business is holding up strongly. That should be good for revenues. Different logistics routes could add costs, which may bring down profit margins. But I think that is better for the company’s finances than production collapsing.
The company made no comment on its dividend in this production report and trading update. I would expect that to come later in the year in its interim or final results. But for now at least, there remains a prospect that Ferrexpo will maintain its juicy dividend. That 19% yield definitely makes the shares tempting as a possible addition to my portfolio.
Why I am avoiding this high-yield share
Despite that, I have decided not to buy Ferrexpo shares. Even before the yield shot up, I had already decided that the risks involved in the company were too big for my appetite. Not only was geographic concentration a risk, the company’s exposure to cyclical metals pricing also means revenues and profits could fall in future. Those risks remain, in my opinion.
On top of that, although I was impressed that the company has largely maintained production, the political risks in Ukraine remain enormous, in my opinion. That remains true for Ferrexpo, just like other companies with large Ukrainian operations. Such a high political risk does not match my investment style of looking for great companies with a promising outlook.
It could lead to a dividend cut or cancellation. So I will not be adding this high-yield share to my portfolio.