Are Dividend Investors Getting More Than They Bargained For With Ujjivan Financial Services Limited's (NSE:UJJIVAN) Dividend?

Today we'll take a closer look at Ujjivan Financial Services Limited (NSE:UJJIVAN) 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. 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.

Investors might not know much about Ujjivan Financial Services's dividend prospects, even though it has been paying dividends for the last five years and offers a 0.3% yield. While the yield may not look too great, the relatively long payment history is interesting. During the year, the company also conducted a buyback equivalent to around 1.2% of its market capitalisation. There are a few simple ways to reduce the risks of buying Ujjivan Financial Services for its dividend, and we'll go through these below.

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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. Although it reported a loss over the past 12 months, Ujjivan Financial Services currently pays a dividend. When a loss-making financial company pays a dividend, the dividend is not being paid out of profit, which is a concern if the company can't return to operating profitably.

Consider getting our latest analysis on Ujjivan Financial Services' 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. Ujjivan Financial Services has been paying a dividend for the past five years. During the past five-year period, the first annual payment was ₹0.5 in 2016, compared to ₹0.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 9.9% a year over that time. The dividends haven't grown at precisely 9.9% every year, but this is a useful way to average out the historical rate of growth.

Dividends have grown at a reasonable rate, but with at least one substantial cut in the payments, we're not certain this dividend stock would be ideal for someone intending to live on the income.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. In the last five years, Ujjivan Financial Services' earnings per share have shrunk at approximately 3.4% per annum. A modest decline in earnings per share is not great to see, but it doesn't automatically make a dividend unsustainable. Still, we'd vastly prefer to see EPS growth when researching dividend stocks.

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. First, it's not great to see a dividend being paid despite the company being unprofitable over the last year. Earnings per share are down, and Ujjivan Financial Services' dividend has been cut at least once in the past, which is disappointing. In short, we're not keen on Ujjivan Financial Services from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Ujjivan Financial Services that investors need to be conscious of moving forward.

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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