Do Investors Have Good Reason To Be Wary Of DYNAM JAPAN HOLDINGS Co., Ltd.'s (HKG:6889) 5.5% Dividend Yield?

Is DYNAM JAPAN HOLDINGS Co., Ltd. (HKG:6889) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

In this case, DYNAM JAPAN HOLDINGS likely looks attractive to dividend investors, given its 5.5% dividend yield and eight-year payment history. We'd agree the yield does look enticing. During the year, the company also conducted a buyback equivalent to around 0.9% of its market capitalisation. There are a few simple ways to reduce the risks of buying DYNAM JAPAN HOLDINGS for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on DYNAM JAPAN HOLDINGS!

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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Looking at the data, we can see that 97% of DYNAM JAPAN HOLDINGS' profits were paid out as dividends in the last 12 months. This is quite a high payout ratio that suggests the dividend is not well covered by earnings.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. DYNAM JAPAN HOLDINGS paid out 88% of its cash flow last year. This may be sustainable but it does not leave much of a buffer for unexpected circumstances. It's good to see that while DYNAM JAPAN HOLDINGS' dividends were not well covered by profits, at least they are affordable from a free cash flow perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

With a strong net cash balance, DYNAM JAPAN HOLDINGS investors may not have much to worry about in the near term from a dividend perspective.

We update our data on DYNAM JAPAN HOLDINGS every 24 hours, so you can always get our latest analysis of its financial health, 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 last decade of data, we can see that DYNAM JAPAN HOLDINGS paid its first dividend at least eight years ago. It's good to see that DYNAM JAPAN HOLDINGS 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 eight-year period, the first annual payment was JP¥11.5 in 2013, compared to JP¥6.0 last year. This works out to be a decline of approximately 7.8% per year over that time. DYNAM JAPAN HOLDINGS' dividend hasn't shrunk linearly at 7.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

A shrinking dividend over a eight-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 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. Over the past five years, it looks as though DYNAM JAPAN HOLDINGS' EPS have declined at around 8.1% a year. 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.

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. We're not keen on the fact that DYNAM JAPAN HOLDINGS paid out such a high percentage of its income, although its cashflow is in better shape. Earnings per share are down, and DYNAM JAPAN HOLDINGS' dividend has been cut at least once in the past, which is disappointing. There are a few too many issues for us to get comfortable with DYNAM JAPAN HOLDINGS from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For example, we've picked out 3 warning signs for DYNAM JAPAN HOLDINGS that investors should know about before committing capital to this stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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