A large part of investment returns can be generated by dividend-paying stock given their role in compounding returns over time. Historically, Shenzhen Investment Limited (HKG:604) has paid a dividend to shareholders. It currently yields 7.1%. Let’s dig deeper into whether Shenzhen Investment should have a place in your portfolio.

Check out our latest analysis for Shenzhen Investment

5 checks you should use to assess a dividend stock

When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:

• Is it the top 25% annual dividend yield payer?

• Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?

• Has the amount of dividend per share grown over the past?

• Can it afford to pay the current rate of dividends from its earnings?

• Will the company be able to keep paying dividend based on the future earnings growth?

How well does Shenzhen Investment fit our criteria?

Shenzhen Investment has a trailing twelve-month payout ratio of 93%, meaning the dividend is not sufficiently covered by its earnings. In the near future, analysts are predicting a more sensible payout ratio of 45%, which, assuming the share price stays the same, leads to a dividend yield of around 6.7%. Furthermore, EPS should increase to HK$0.40, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.

If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Not only have dividend payouts from Shenzhen Investment fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. These characteristics do not bode well for income investors seeking reliable stream of dividends.

Compared to its peers, Shenzhen Investment generates a yield of 7.1%, which is high for Real Estate stocks.

Next Steps:

If you are building an income portfolio, then Shenzhen Investment is a complicated choice since it has some positive aspects as well as negative ones. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. I’ve put together three fundamental factors you should further examine:

1. Future Outlook: What are well-informed industry analysts predicting for 604’s future growth? Take a look at our free research report of analyst consensus for 604’s outlook.

2. Valuation: What is 604 worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether 604 is currently mispriced by the market.

3. Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.