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Dividend paying stocks like Best Mart 360 Holdings Limited (HKG:2360) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
Some readers mightn't know much about Best Mart 360 Holdings's 1.5% dividend, as it has only been paying distributions for a year or so. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.
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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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 118% of Best Mart 360 Holdings's profits were paid out as dividends in the last 12 months. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Best Mart 360 Holdings paid out 91% of its free cash flow last year, which we think is concerning if cash flows do not improve. As Best Mart 360 Holdings's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.
With a strong net cash balance, Best Mart 360 Holdings investors may not have much to worry about in the near term from a dividend perspective.
We update our data on Best Mart 360 Holdings every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Volatility
From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. This works out to a decline of approximately 50% over that time.
We struggle to make a case for buying Best Mart 360 Holdings for its dividend, given that payments have shrunk over the past one years.