U.S. Markets open in 5 hrs 28 mins

Is Heritage Insurance Holdings, Inc. (NYSE:HRTG) A Great Dividend Stock?

Simply Wall St

Dividend paying stocks like Heritage Insurance Holdings, Inc. (NYSE:HRTG) 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 stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

Investors might not know much about Heritage Insurance Holdings's dividend prospects, even though it has been paying dividends for the last four years and offers a 1.7% yield. While the yield may not look too great, the relatively long payment history is interesting. The company also returned around 3.5% of its market capitalisation to shareholders in the form of stock buybacks over the past year. There are a few simple ways to reduce the risks of buying Heritage Insurance Holdings for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

NYSE:HRTG Historical Dividend Yield, November 19th 2019

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. In the last year, Heritage Insurance Holdings paid out 35% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Consider getting our latest analysis on Heritage Insurance Holdings's financial position here.

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 Heritage Insurance Holdings has been paying a dividend for the past four years. The dividend has not fluctuated much, but with a relatively short payment history, we can't be sure this is sustainable across a full market cycle. During the past four-year period, the first annual payment was US$0.20 in 2015, compared to US$0.24 last year. Dividends per share have grown at approximately 4.7% per year over this time.

Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn't want to rely on this dividend too much.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Over the past five years, it looks as though Heritage Insurance Holdings's EPS have declined at around 22% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Heritage Insurance Holdings's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Heritage Insurance Holdings's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Heritage Insurance Holdings has a low and conservative payout ratio. Earnings per share are down, and to our mind Heritage Insurance Holdings has not been paying a dividend long enough to demonstrate its resilience across economic cycles. In summary, we're unenthused by Heritage Insurance Holdings as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.

Given that earnings are not growing, the dividend does not look nearly so attractive. Very few businesses see earnings consistently shrink year after year in perpetuity though, and so it might be worth seeing what the 4 analysts we track are forecasting for the future.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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.

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. Thank you for reading.