Dividend paying stocks like Harbour Centre Development Limited (HKG:51) 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. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

While Harbour Centre Development's 2.5% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Harbour Centre Development!

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 29% of Harbour Centre Development's profits were paid out as dividends in the last 12 months. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Harbour Centre Development's cash payout ratio last year was 9.7%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout. It's positive to see that Harbour Centre Development's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

While the above analysis focuses on dividends relative to a company's earnings, we do note Harbour Centre Development's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Harbour Centre Development's latest financial position, by checking our visualisation of its financial health.

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. For the purpose of this article, we only scrutinise the last decade of Harbour Centre Development's dividend payments. Its dividend payments have fallen by 20% or more on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was HK$0.20 in 2010, compared to HK$0.30 last year. This works out to be a compound annual growth rate (CAGR) of approximately 4.1% a year over that time. Harbour Centre Development's dividend payments have fluctuated, so it hasn't grown 4.1% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Harbour Centre Development's EPS have fallen by approximately 10% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

Conclusion

To summarise, shareholders should always check that Harbour Centre Development's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's great to see that Harbour Centre Development is paying out a low percentage of its earnings and cash flow. Earnings per share are down, and Harbour Centre Development's dividend has been cut at least once in the past, which is disappointing. Ultimately, Harbour Centre Development comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Harbour Centre Development stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.