Here's What You Should Know About Bank of Zhengzhou Co., Ltd.'s (HKG:6196) 4.8% Dividend Yield

Is Bank of Zhengzhou Co., Ltd. (HKG:6196) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Bank of Zhengzhou is a new dividend aristocrat in the making. It sure looks interesting on these metrics - but there's always more to the story. Some simple analysis can reduce the risk of holding Bank of Zhengzhou for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Bank of Zhengzhou!

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. 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, Bank of Zhengzhou paid out 26% of its profit as dividends. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.

Consider getting our latest analysis on Bank of Zhengzhou's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Bank of Zhengzhou has been paying a dividend for the past five years. During the past five-year period, the first annual payment was CN¥0.2 in 2016, compared to CN¥0.08 last year. Dividend payments have fallen sharply, down 50% over that time.

We struggle to make a case for buying Bank of Zhengzhou for its dividend, given that payments have shrunk over the past five years.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. It's not great to see that Bank of Zhengzhou's have fallen at approximately 9.2% over the past five years. 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

To summarise, shareholders should always check that Bank of Zhengzhou's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're glad to see Bank of Zhengzhou has a low payout ratio, as this suggests earnings are being reinvested in the business. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. In summary, we're unenthused by Bank of Zhengzhou as a dividend stock. It's not that we think it is a bad company; it simply falls short of our criteria in some key areas.

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. For example, we've identified 4 warning signs for Bank of Zhengzhou (2 don't sit too well with us!) that you should be aware of before investing.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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