Dividend paying stocks like Tian An China Investments Company Limited (HKG:28) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.
In this case, Tian An China Investments likely looks attractive to investors, given its 5.9% dividend yield and a payment history of over ten years. We'd guess that plenty of investors have purchased it for the income. Some simple research can reduce the risk of buying Tian An China Investments for its dividend - read on to learn more.
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Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. In the last year, Tian An China Investments paid out 24% of its profit as dividends. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Tian An China Investments paid out 1275% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. Tian An China Investments paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Tian An China Investments's ability to maintain its dividend.
Remember, you can always get a snapshot of Tian An China Investments'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 Tian An China Investments's dividend payments. The dividend has been cut on at least one occasion historically. During the past ten-year period, the first annual payment was HK$0.03 in 2010, compared to HK$0.20 last year. Dividends per share have grown at approximately 21% per year over this time. Tian An China Investments's dividend payments have fluctuated, so it hasn't grown 21% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.