Should You Buy Monte Carlo Fashions Limited (NSE:MONTECARLO) For Its Dividend?

Dividend paying stocks like Monte Carlo Fashions Limited (NSE:MONTECARLO) 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 the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With a five-year payment history and a 3.0% yield, many investors probably find Monte Carlo Fashions intriguing. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Monte Carlo Fashions for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

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. In the last year, Monte Carlo Fashions paid out 17% of its profit as dividends. Given the low payout ratio, it is hard to envision the dividend coming under threat, barring a catastrophe.

While the above analysis focuses on dividends relative to a company's earnings, we do note Monte Carlo Fashions's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Remember, you can always get a snapshot of Monte Carlo Fashions's 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. Monte Carlo Fashions has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ₹10.00 in 2015, compared to ₹5.00 last year. Dividend payments have fallen sharply, down 50% over that time.

We struggle to make a case for buying Monte Carlo Fashions for its dividend, given that payments have shrunk over the past five 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. While there may be fluctuations in the past , Monte Carlo Fashions's earnings per share have basically not grown from where they were five years ago. Flat earnings per share are acceptable for a time, but over the long term, the purchasing power of the company's dividends could be eroded by inflation. As we saw above, earnings per share growth has not been strong. On the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.

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 glad to see Monte Carlo Fashions has a low payout ratio, as this suggests earnings are being reinvested in the business. Unfortunately, the company has not been able to generate earnings growth, and cut its dividend at least once in the past. Monte Carlo Fashions 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.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. However, there are other things to consider for investors when analysing stock performance. For example, we've picked out 2 warning signs for Monte Carlo Fashions that investors should know about before committing capital to this stock.

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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