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Does Heartland Group Holdings Limited (NZSE:HGH) Have A Place In Your Dividend Stock Portfolio?

Simply Wall St

Could Heartland Group Holdings Limited (NZSE:HGH) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.

With a seven-year payment history and a 6.9% yield, many investors probably find Heartland Group Holdings intriguing. We'd agree the yield does look enticing. Some simple analysis can reduce the risk of holding Heartland Group Holdings for its dividend, and we'll focus on the most important aspects below.

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NZSE:HGH Historical Dividend Yield, March 2nd 2020

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Heartland Group Holdings paid out 91% of its profit as dividends, over the trailing twelve month period. With a payout ratio this high, we'd say its dividend is not well covered by earnings. This may be fine if earnings are growing, but it might not take much of a downturn for the dividend to come under pressure.

Consider getting our latest analysis on Heartland Group Holdings's financial position 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. Heartland Group Holdings has been paying a dividend for the past seven years. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past seven-year period, the first annual payment was NZ$0.04 in 2013, compared to NZ$0.11 last year. This works out to be a compound annual growth rate (CAGR) of approximately 16% a year over that time. The dividends haven't grown at precisely 16% every year, but this is a useful way to average out the historical rate of growth.

Heartland Group Holdings has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, but it might be worth considering if the business has turned a corner.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Heartland Group Holdings has grown its earnings per share at 6.7% per annum over the past five years. Although per-share earnings are growing at a credible rate, virtually all of the income is being paid out as dividends to shareholders. This is okay, but may limit growth in the company's future dividend payments.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We're a bit uncomfortable with its high payout ratio. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. To conclude, we've spotted a couple of potential concerns with Heartland Group Holdings that may make it less than ideal candidate for dividend investors.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 4 Heartland Group Holdings analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.