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Looking For Steady Income For Your Dividend Portfolio? Is SUTL Enterprise Limited (SGX:BHU) A Good Fit?

Simply Wall St

Dividend paying stocks like SUTL Enterprise Limited (SGX:BHU) 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. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

In this case, SUTL Enterprise pays a decent-sized 4.0% dividend yield, and has been distributing cash to shareholders for the past three years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple research can reduce the risk of buying SUTL Enterprise for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on SUTL Enterprise!

SGX:BHU Historical Dividend Yield, February 6th 2020

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, SUTL Enterprise paid out 32% 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. Plus, there is room to increase the payout ratio over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. SUTL Enterprise paid out 173% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. SUTL Enterprise paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to SUTL Enterprise's ability to maintain its dividend.

With a strong net cash balance, SUTL Enterprise investors may not have much to worry about in the near term from a dividend perspective.

We update our data on SUTL Enterprise every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

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. 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. Its most recent annual dividend was S$0.02 per share, effectively flat on its first payment three years ago.

We like that the dividend hasn't been shrinking. However we're conscious that the company hasn't got an overly long track record of dividend payments yet, which makes us wary of relying on its dividend income.

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. In the last five years, SUTL Enterprise's earnings per share have shrunk at approximately 2.9% per annum. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. SUTL Enterprise has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. With this information in mind, we think SUTL Enterprise may not be an ideal dividend stock.

Now, if you want to look closer, it would be worth checking out our free research on SUTL Enterprise management tenure, salary, and performance.

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.