Looking For Steady Income For Your Dividend Portfolio? Is Kalyani Forge Limited (NSE:KALYANIFRG) A Good Fit?

Is Kalyani Forge Limited (NSE:KALYANIFRG) 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 popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

While Kalyani Forge's 0.6% dividend yield is not the highest, we think its lengthy payment history is quite interesting. Some simple analysis can reduce the risk of holding Kalyani Forge for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Kalyani Forge!

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While Kalyani Forge pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Kalyani Forge's cash payout ratio last year was 24%. Cash flows are typically lumpy, but this looks like an appropriately conservative payout.

Remember, you can always get a snapshot of Kalyani Forge's latest financial position, by checking our visualisation of its financial health.

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 Kalyani Forge's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was ₹1.8 in 2011, compared to ₹1.0 last year. The dividend has shrunk at around 5.7% a year during that period. Kalyani Forge's dividend hasn't shrunk linearly at 5.7% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Kalyani Forge 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. Kalyani Forge's earnings per share have shrunk at 33% a year over the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Kalyani Forge's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Kalyani Forge'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 not keen on the fact that Kalyani Forge paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Earnings per share are down, and Kalyani Forge's dividend has been cut at least once in the past, which is disappointing. In summary, Kalyani Forge has a number of shortcomings that we'd find it hard to get past. Things could change, but we think there are a number of better ideas out there.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. 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 3 warning signs for Kalyani Forge you should be aware of, and 2 of them are a bit unpleasant.

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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