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Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Zhongyuan Bank Co Ltd (HKG:1216) has started paying a dividend to shareholders. It currently trades on a yield of 3.5%. Should it have a place in your portfolio? Let’s take a look at Zhongyuan Bank in more detail.

View our latest analysis for Zhongyuan Bank

How I analyze a dividend stock

Whenever I am looking at a potential dividend stock investment, I always check these five metrics:

• Is it paying an annual yield above 75% of dividend payers?

• Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?

• Has dividend per share amount increased over the past?

• Does earnings amply cover its dividend payments?

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

How does Zhongyuan Bank fare?

The current trailing twelve-month payout ratio for the stock is 36%, which means that the dividend is covered by earnings. Furthermore, analysts have not forecasted a dividends per share for the future, which makes it hard to determine the yield shareholders should expect, and whether the current payout is sustainable, moving forward.

If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. Unfortunately, it is really too early to view Zhongyuan Bank as a dividend investment. Last year was the company’s first dividend payment, so it is certainly early days. The standard practice for reliable payers is to look for 10 or so years of track record.

Relative to peers, Zhongyuan Bank produces a yield of 3.5%, which is on the low-side for Banks stocks.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in Zhongyuan Bank for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. Below, I’ve compiled three fundamental aspects you should look at:

1. Future Outlook: What are well-informed industry analysts predicting for 1216’s future growth? Take a look at our free research report of analyst consensus for 1216’s outlook.

2. Valuation: What is 1216 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 1216 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.