Dividend paying stocks like Tata Steel Long Products Limited (NSE:TATASTLLP) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
A high yield and a long history of paying dividends is an appealing combination for Tata Steel Long Products. We'd guess that plenty of investors have purchased it for the income. There are a few simple ways to reduce the risks of buying Tata Steel Long Products for its dividend, and we'll go through these below.
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Payout ratios
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although it reported a loss over the past 12 months, Tata Steel Long Products currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.
Unfortunately, while Tata Steel Long Products pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.
With a strong net cash balance, Tata Steel Long Products investors may not have much to worry about in the near term from a dividend perspective.
We update our data on Tata Steel Long Products every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Tata Steel Long Products has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was ₹8.00 in 2009, compared to ₹12.50 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.6% a year over that time. Tata Steel Long Products's dividend payments have fluctuated, so it hasn't grown 4.6% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.