Is Zengame Technology Holding Limited (HKG:2660) A Smart Pick For Income Investors?

Today we'll take a closer look at Zengame Technology Holding Limited (HKG:2660) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. 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.

Zengame Technology Holding pays a 4.2% dividend yield, and has been paying dividends for the past two years. It's certainly an attractive yield, but readers are likely curious about its staying power. The company also bought back stock equivalent to around 1.1% of market capitalisation this year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

Explore this interactive chart for our latest analysis on Zengame Technology Holding!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. 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 23% of Zengame Technology Holding's profits were paid out as dividends in the last 12 months. We'd say its dividends are thoroughly covered by earnings.

With a strong net cash balance, Zengame Technology Holding investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Zengame Technology Holding's 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. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past two-year period, the first annual payment was CN¥0.09 in 2019, compared to CN¥0.05 last year. Dividend payments have fallen sharply, down 44% over that time.

We struggle to make a case for buying Zengame Technology Holding for its dividend, given that payments have shrunk over the past two 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. Zengame Technology Holding's earnings per share are up 30% on last year. We're glad to see EPS up on last year, but we're conscious that growth rates typically slow as companies increase in size. Earnings per share have grown rapidly, and the company is retaining a majority of its earnings. We think this is ideal from an investment perspective, if the company is able to reinvest these earnings effectively. Any one year of performance can be misleading for a variety of reasons, so we wouldn't like to form any strong conclusions based on these numbers alone.

Conclusion

To summarise, shareholders should always check that Zengame Technology Holding's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Zengame Technology Holding has a low and conservative payout ratio. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Zengame Technology Holding has a number of positive attributes, but falls short of our ideal dividend company. It may be worth a look at the right price, though.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. Taking the debate a bit further, we've identified 2 warning signs for Zengame Technology Holding that investors need to be conscious of moving forward.

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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