Tread With Caution Around Centrepoint Alliance Limited's (ASX:CAF) 8.5% Dividend Yield

Dividend paying stocks like Centrepoint Alliance Limited (ASX:CAF) 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 the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

In this case, Centrepoint Alliance likely looks attractive to dividend investors, given its 8.5% dividend yield and seven-year payment history. It sure looks interesting on these metrics - but there's always more to the story. The company also bought back stock equivalent to around 1.1% of market capitalisation this year. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Click the interactive chart for our full dividend analysis

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. Centrepoint Alliance paid out 132% of its profit as dividends, over the trailing twelve month period. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

We update our data on Centrepoint Alliance 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. Centrepoint Alliance has been paying a dividend for the past seven years. It's good to see that Centrepoint Alliance has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past seven-year period, the first annual payment was AU$0.02 in 2014, compared to AU$0.02 last year. This works out to be a decline of approximately 1.4% per year over that time. Centrepoint Alliance's dividend has been cut sharply at least once, so it hasn't fallen by 1.4% every year, but this is a decent approximation of the long term change.

A shrinking dividend over a seven-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Centrepoint Alliance's EPS have fallen by approximately 18% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

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. First, it's not great to see how much of its earnings are being paid as dividends. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. In short, we're not keen on Centrepoint Alliance from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. Case in point: We've spotted 5 warning signs for Centrepoint Alliance (of which 1 is significant!) you should know about.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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