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Dividend paying stocks like Mortgage Choice Limited (ASX:MOC) tend to be popular with investors, and for good reason – some research shows that 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.
With Mortgage Choice yielding 6.8% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying Mortgage Choice for its dividend, and we’ll go through these below.Click the interactive chart for our full dividend analysis
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 be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. While Mortgage Choice pays a dividend, it reported a loss over the last year. When a financial business is loss-making, its dividend is not covered by earnings. Its important that investors assess the quality of the company’s assets and whether it can return to generating a positive income.
We update our data on Mortgage Choice every 24 hours, so you can always get our latest analysis of its financial health, here.
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 Mortgage Choice’s dividend payments. This dividend has been unstable, which we define as having fallen by at least 20% one or more times over this time. During the past ten-year period, the first annual payment was AU$0.10 in 2009, compared to AU$0.06 last year. The dividend has shrunk at around -5.2% a year during that period. Mortgage Choice’s dividend hasn’t shrunk linearly at -5.2% per annum, but the CAGR is a useful estimate of the historical rate of change.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. In the last five years, Mortgage Choice’s earnings per share have shrunk at approximately 15% per annum. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company’s dividend.
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. Mortgage Choice is paying out a larger percentage of its profit than we’re comfortable with. Earnings per share are down, and Mortgage Choice’s dividend has been cut at least once in the past, which is disappointing. Using these criteria, Mortgage Choice looks suboptimal from a dividend investment perspective.
Now, if you want to look closer, it would be worth checking out our free research on Mortgage Choice management tenure, salary, and performance.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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.