The FTSE 100 average dividend yield is considered to be 3%. Global mining giant Evraz (LSE:EVR) currently boasts a yield of over 12%, which is tempting. Sometimes, a large payout could also be a sign of trouble, however. I want to know if Evraz is in trouble or if I should invest in shares for my portfolio to make a passive income.
FTSE 100 mining giant
Evraz is a global mining firm and one of the largest steel producers in the world. The global reopening since the pandemic has benefitted Evraz recently. Major economies across the world have seen demand for steel skyrocket whereas supply is not as prevalent. This usually results in higher prices.
A high dividend yield can be created by a sharply falling share price. This is not the case for Evraz. As I write, its share price is trading for 561p per share. This time last year, shares were trading for 326p per share which means shares are up over 70% in the past year. In 2021, Evraz shares are up 14% too.
Performance backs up dividend yield
Last month, Evraz released its half-year report which covered the six months to 30 June 2021. Overall, it made for good reading. I believe these favourable results are due to the reopening and increased demand for commodities I mentioned earlier.
Looking at the highlights from the interim report, a rise in steel, coal, and vanadium prices benefitted Evraz’s bottom line handsomely. Consolidated revenues increased by 24% and profit increased by 96%. Free cash flow was up to $836m compared to $315m in the same period last year. Net debt had also decreased which is positive. As a result, Evraz declared an interim dividend of $0.55 per share. That equates to a 6%-plus dividend yield. A total dividend yield of 12% seems affordable for the FTSE 100 incumbent.
Risks and my verdict
There are credible risks related to Evraz and they could affect any potential dividend yield. Firstly, the price of steel has risen as demand has been outstripping supply. As supply and demand could converge, the drop in steel prices could eventually affect Evraz’s bottom line. Furthermore, Evraz is not in control of the prices of commodities. These prices are set by the market and external factors such as political factors can affect prices. As Evraz is not in control, this volatility could affect Evraz’s performance as well.
Overall, I am usually put off by firms that do not have a say in the pricing of their products. Evraz is an exception to this, however. I believe it is one of the best shares for me to buy on the FTSE 100. I think it can make me a passive income for my portfolio with its great dividend yield. It is one of the biggest operators in the world with a diverse set of operations and a favourable track record too. I am aware of the risks involved but I would buy shares today.
Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.