Dividend paying stocks like New Century Real Estate Investment Trust (HKG:1275) 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. 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.
In this case, New Century Real Estate Investment Trust likely looks attractive to dividend investors, given its 6.7% 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
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 48% of New Century Real Estate Investment Trust's profits were paid out as dividends in the last 12 months. This is medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. New Century Real Estate Investment Trust paid out a conservative 48% of its free cash flow as dividends last year.
REITs like New Century Real Estate Investment Trust often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Remember, you can always get a snapshot of New Century Real Estate Investment Trust's latest financial position, by checking our visualisation of its financial health.
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 New Century Real Estate Investment Trust has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.12 in 2014, compared to CN¥0.10 last year. The dividend has shrunk at around -4.0% a year during that period. New Century Real Estate Investment Trust's dividend hasn't shrunk linearly at -4.0% per annum, but the CAGR is a useful estimate of the historical rate of change.