Today we'll take a closer look at Boustead Projects Limited (SGX:AVM) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
With a 1.6% yield and a five-year payment history, investors probably think Boustead Projects looks like a reliable dividend stock. A 1.6% yield is not inspiring, but the longer payment history has some appeal. During the year, the company also conducted a buyback equivalent to around 2.9% of its market capitalisation. Some simple analysis can reduce the risk of holding Boustead Projects for its dividend, and we'll focus on the most important aspects 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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 21% of Boustead Projects's profits were paid out as dividends in the last 12 months. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Boustead Projects's cash payout ratio last year was 19%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
With a strong net cash balance, Boustead Projects investors may not have much to worry about in the near term from a dividend perspective.
Consider getting our latest analysis on Boustead Projects's financial position 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. Looking at the data, we can see that Boustead Projects has been paying a dividend for the past five years. During the past five-year period, the first annual payment was S$0.25 in 2015, compared to S$0.015 last year. Dividend payments have fallen sharply, down 94% over that time.