Attention Dividend Investors: This Is 1 Risk You Must Note

When it comes to assessing the investing merits of a dividend stock, one important criteria I like to emphasize is the strength of the company’s balance sheet (see this as an example).

I was reminded of that importance by the recent experience of London-listed mining giant Glencore PLC. Last week, the company announced that it would be cutting its dividends completely, among other measures, in a bid to conserve cash and strengthen its balance sheet.

This comes after Glencore’s credit rating agencies and investors had voiced their concerns over the company’s ballooning debt levels amid falling prices for many of its core commodities like copper. The chart below (click for larger image), which plots some key figures from Glencore’s balance sheet, is a good representation of how much its debt had grown.

Glencore's balance sheet

Source: S&P Capital IQ; net-debt here refers to total debt minus cash & short-term investments

Beyond the elimination of its dividends, Glencore would also be slashing its capital expenditures and selling some of its assets to raise cash. These actions may cause the company’s future growth to suffer and ultimately hamper its dividends as well.

Here are some blue chips in Singapore’s stock market with high dividend yields of more than 5% based on their payouts for their last-completed fiscal year: Keppel Corporation Limited  (SGX: BN4), SembCorp Marine Ltd (SGX: S51), StarHub Ltd (SGX: CC3), Singapore Technologies Engineering Ltd  (SGX: S63), and CapitaLand Mall Trust (SGX: C38U).

Keppel Corp, SembCorp Marine, StarHub, ST Engineering, CapitaLand Mall Trust dividend yield details

Source: S&P Capital IQ

Some within that group of shares – like Keppel Corp and SembCorp Marine – have seen their debt-levels climb over the years. In the chart below (click for larger image), you can observe how Keppel Corp and SembCorp Marine’s net-cash position (total cash & short-term investments minus total borrowings) had declined drastically over the years.

Keppel Corp and SembCorp Marine's balance sheet

S&P Capital IQ

While the high yields of the quintet are enticing, it’d pay for investors to keep a close watch on their balance sheets lest they suffer a similar fate as Glencore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.