Key Things To Watch Out For If You Are After Swelect Energy Systems Limited's (NSE:SWELECTES) 0.8% Dividend

Dividend paying stocks like Swelect Energy Systems Limited (NSE:SWELECTES) 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. 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.

A slim 0.8% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Swelect Energy Systems could have potential. That said, the recent jump in the share price will make Swelect Energy Systems's dividend yield look smaller, even though the company prospects could be improving. Some simple research can reduce the risk of buying Swelect Energy Systems for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Swelect Energy Systems!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. Looking at the data, we can see that 11% of Swelect Energy Systems' profits were paid out as dividends in the last 12 months. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

With a strong net cash balance, Swelect Energy Systems investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of Swelect Energy Systems' 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. For the purpose of this article, we only scrutinise the last decade of Swelect Energy Systems' dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was ₹2.0 in 2011, compared to ₹1.5 last year. This works out to be a decline of approximately 2.8% per year over that time. Swelect Energy Systems' dividend hasn't shrunk linearly at 2.8% per annum, but the CAGR is a useful estimate of the historical rate of change.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Earnings have grown at around 9.3% a year for the past five years, which is better than seeing them shrink! With a decent amount of growth and a low payout ratio, we think this bodes well for Swelect Energy Systems's prospects of growing its dividend payments in the future.

Conclusion

To summarise, shareholders should always check that Swelect Energy Systems' 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 Swelect Energy Systems has a low payout ratio, as this suggests earnings are being reinvested in the business. 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. Swelect Energy Systems 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. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Case in point: We've spotted 5 warning signs for Swelect Energy Systems (of which 1 is significant!) you should know about.

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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