How Does China Overseas Property Holdings Limited (HKG:2669) Fare As A Dividend Stock?

Dividend paying stocks like China Overseas Property Holdings Limited (HKG:2669) 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. 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 1.2% yield and a five-year payment history, investors probably think China Overseas Property Holdings looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. Remember that the recent share price drop will make China Overseas Property Holdings's yield look higher, even though recent events might have impacted the company's prospects. Some simple research can reduce the risk of buying China Overseas Property Holdings for its dividend - read on to learn more.

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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. China Overseas Property Holdings paid out 29% of its profit as dividends, over the trailing twelve month period. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. One of the risks is that management reinvests the retained capital poorly instead of paying a higher dividend.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. China Overseas Property Holdings' cash payout ratio last year was 23%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that China Overseas Property Holdings' dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

With a strong net cash balance, China Overseas Property Holdings investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of China Overseas Property Holdings' latest financial position, by checking our visualisation of its financial health.

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. Looking at the data, we can see that China Overseas Property Holdings has been paying a dividend for the past five years. During the past five-year period, the first annual payment was HK$0.01 in 2015, compared to HK$0.06 last year. This works out to be a compound annual growth rate (CAGR) of approximately 36% a year over that time.

China Overseas Property Holdings has been growing its dividend quite rapidly, which is exciting. However, the short payment history makes us question whether this performance will persist across a full market cycle.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. It's good to see China Overseas Property Holdings has been growing its earnings per share at 42% a year over the past five years. Earnings per share have rocketed in recent times, and we like that the company is retaining more than half of its earnings to reinvest. However, always remember that very few companies can grow at double digit rates forever.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Firstly, we like that China Overseas Property Holdings has low and conservative payout ratios. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Overall we think China Overseas Property Holdings scores well on our analysis. It's not quite perfect, but we'd definitely be keen to take a closer look.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 1 warning sign for China Overseas Property Holdings that investors should take into consideration.

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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