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Why I’d buy this 13% FTSE 100 dividend yield for my ISA today

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The average dividend yield in the FTSE 100 is 4.5%. But the FTSE stock I want to talk about today offers a forecast yield for 2019 of 14.2%. And, as far as I can see, this payout should be completely affordable.

The company is Russia-based mining and steel group Evraz (LSE: EVR). Here, I’ll explain why this yield is so high and why I think its shares are worth considering.

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Is this 14% payout for real?

Broker forecasts indicate Evraz is expected to pay a total dividend of $0.645 per share for 2019. Based on the last-seen share price and today’s USD:GBP exchange rate, I estimate this will provide the aforementioned 14.2% yield.

Although it’s quite generous, this payout looks affordable to me. It should be covered about 1.3 times by earnings. Based on last year’s accounts, I’m also confident it will be covered by the group’s free cash flow — genuine spare cash.

Are profits about to collapse?

One reason why the yield is so high is that the current share price values the stock at just 5.3 times 2019 forecast earnings. This suggests to me the market believes profits may have peaked for this cycle.

Mining companies’ profits depend heavily on commodity prices and demand. City analysts expect many big miners to report lower profits in 2020, based on expectations for slower global growth. For Evraz, consensus forecasts suggest a 9% drop in earnings and a 17% cut to the dividend payout, cutting the yield to about 11%.

Most miners link their dividends to profits, rather than aiming for an increase each year. So if you own shares in Evraz, you should be aware the dividend may rise or fall each year, depending on market conditions.

The Russian connection

There are a couple of special risks I also think investors should be aware of before investing in Evraz.

Its biggest shareholder is Russian billionaire and Chelsea Football Club owner Roman Abramovich, with a 28.8% stake. The firm’s chairman and chief executive — who are said to be allies of Abramovich — control a further 29.1% of the stock. Between them, the trio own almost 58% of EVR stock, so have complete voting control of the business.

The firm’s continued involvement in coal production is another risk, as it’s likely to deter many investors from outside Russia.

For these reasons, I’d always expect Evraz to trade on a more modest valuation than big miners such as Rio Tinto and BHP.

My view

I don’t think this is the safest dividend you’ll find in the FTSE 100. But with that forecast yield of 14% for 2019 and about 11.5% for 2020, you can’t expect complete safety.

My personal view is that this firm is quite well-run, with the aim of providing maximum income for its billionaire owners. One risk is that, at some point, they might sell, or else change the structure of the investment.

Another risk is that it could suffer from political interference, either in Russia or the US, where Evraz has a sizeable steel business.

This is an unconventional stock. But for investors with a long-term view and enough risk tolerance, I think Evraz shares could be a profitable income buy. Naturally, I’d keep the stock in my Stocks and Shares ISA, to ensure my dividends remained tax free.

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Roland Head owns shares of BHP. The Motley Fool UK 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.

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