Dividend paying stocks like Telecom Service One Holdings Limited (HKG:3997) 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.

In this case, Telecom Service One Holdings likely looks attractive to dividend investors, given its 5.8% dividend yield and five-year payment history. We'd agree the yield does look enticing. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Telecom Service One Holdings paid out 91% of its profit as dividends, over the trailing twelve month period. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Telecom Service One Holdings paid out 95% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Telecom Service One Holdings's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

With a strong net cash balance, Telecom Service One Holdings investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Telecom Service One 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. Telecom Service One Holdings has been paying a dividend for the past five years. During the past five-year period, the first annual payment was HK$0.25 in 2014, compared to HK$0.07 last year. The dividend has fallen 72% over that period.

We struggle to make a case for buying Telecom Service One Holdings for its dividend, given that payments have shrunk over the past five years.