Dividend paying stocks like New Century Real Estate Investment Trust (HKG:1275) 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 popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
In this case, New Century Real Estate Investment Trust likely looks attractive to dividend investors, given its 6.7% dividend yield and five-year payment history. We'd agree the yield does look enticing. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.
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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Looking at the data, we can see that 48% of New Century Real Estate Investment Trust's profits were paid out as dividends in the last 12 months. This is medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.
We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. New Century Real Estate Investment Trust paid out a conservative 48% of its free cash flow as dividends last year.
REITs like New Century Real Estate Investment Trust often have different rules governing their distributions, so a higher payout ratio on its own is not unusual.
Remember, you can always get a snapshot of New Century Real Estate Investment Trust's latest financial position, by checking our visualisation of its financial health.
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 New Century Real Estate Investment Trust has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.12 in 2014, compared to CN¥0.10 last year. The dividend has shrunk at around -4.0% a year during that period. New Century Real Estate Investment Trust's dividend hasn't shrunk linearly at -4.0% per annum, but the CAGR is a useful estimate of the historical rate of change.
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? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see New Century Real Estate Investment Trust has grown its earnings per share at 64% per annum over the past five years. With high earnings per share growth in recent times and a modest payout ratio, we think this is an attractive combination if earnings can be reinvested to generate further growth.
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. Firstly, we like that New Century Real Estate Investment Trust has low and conservative payout ratios. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. New Century Real Estate Investment Trust performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.
Are management backing themselves to deliver performance? Check their shareholdings in New Century Real Estate Investment Trust in our latest insider ownership analysis.
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 firstname.lastname@example.org. 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.