Key Things To Consider Before Buying McChip Resources Inc. (CVE:MCS) For Its Dividend

Could McChip Resources Inc. (CVE:MCS) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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 McChip Resources yielding 4.1% 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. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on McChip Resources!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, McChip Resources paid out 8.3% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. McChip Resources paid out 65% of its free cash flow last year, which is acceptable, but is starting to limit the amount of earnings that can be reinvested into the business. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

While the above analysis focuses on dividends relative to a company's earnings, we do note McChip Resources' strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on McChip Resources' financial position here.

Dividend Volatility

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. For the purpose of this article, we only scrutinise the last decade of McChip Resources' dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was CA$0.2 in 2011, compared to CA$0.04 last year. Dividend payments have fallen sharply, down 80% over that time.

We struggle to make a case for buying McChip Resources for its dividend, given that payments have shrunk over the past 10 years.

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. Earnings have grown at around 7.1% a year for the past five years, which is better than seeing them shrink! A low payout ratio and strong historical earnings growth suggests McChip Resources has been effectively reinvesting in its business. We think this generally bodes well for its dividend prospects.

Conclusion

To summarise, shareholders should always check that McChip Resources' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Above all, we're glad to see that McChip Resources pays out a low fraction of its earnings and, while it paid a higher percentage of cashflow, this also was within a normal range. Unfortunately, earnings growth has also been mediocre, and the company has cut its dividend at least once in the past. Ultimately, McChip Resources comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Just as an example, we've come accross 5 warning signs for McChip Resources you should be aware of, and 2 of them are a bit concerning.

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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