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Today we'll take a closer look at Hawthorn Bancshares, Inc. (NASDAQ:HWBK) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.
While Hawthorn Bancshares's 1.8% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Some simple research can reduce the risk of buying Hawthorn Bancshares for its dividend - read on to learn more.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Hawthorn Bancshares paid out 18% of its profit as dividends, over the trailing twelve month period. We'd say its dividends are thoroughly covered by earnings.
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. For the purpose of this article, we only scrutinise the last decade of Hawthorn Bancshares's dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was US$0.55 in 2009, compared to US$0.46 last year. The dividend has shrunk at around 1.7% a year during that period. Hawthorn Bancshares's dividend hasn't shrunk linearly at 1.7% per annum, but the CAGR is a useful estimate of the historical rate of change.
When a company's per-share dividend falls we question if this reflects poorly on either the business or management. Either way, we find it hard to get excited about a company with a declining dividend.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Hawthorn Bancshares has grown its earnings per share at 25% per annum over the past five years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly - an ideal combination.
To summarise, shareholders should always check that Hawthorn Bancshares's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're glad to see Hawthorn Bancshares has a low payout ratio, as this suggests earnings are being reinvested in the business. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Hawthorn Bancshares has a credible record on several fronts, but falls slightly short of our standards for a dividend stock.
Are management backing themselves to deliver performance? Check their shareholdings in Hawthorn Bancshares in our latest insider ownership analysis.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield 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 email@example.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.