Vidhi Specialty Food Ingredients Limited's (NSE:VIDHIING) Attractive Combination: Does It Earn A Place In Your Dividend Portfolio?

Could Vidhi Specialty Food Ingredients Limited (NSE:VIDHIING) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With a 0.7% yield and a eight-year payment history, investors probably think Vidhi Specialty Food Ingredients looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. There are a few simple ways to reduce the risks of buying Vidhi Specialty Food Ingredients 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. Looking at the data, we can see that 12% of Vidhi Specialty Food Ingredients' 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.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Vidhi Specialty Food Ingredients' cash payout ratio last year was 14%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Vidhi Specialty Food Ingredients' 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.

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

Consider getting our latest analysis on Vidhi Specialty Food Ingredients' 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. Looking at the last decade of data, we can see that Vidhi Specialty Food Ingredients paid its first dividend at least eight years ago. It's good to see that Vidhi Specialty Food Ingredients has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past eight-year period, the first annual payment was ₹0.2 in 2013, compared to ₹1.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 22% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.

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? Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Vidhi Specialty Food Ingredients has grown its earnings per share at 18% per annum over the past five years. Earnings per share are growing at a solid clip, and the payout ratio is low. We think this is an ideal combination in a dividend stock.

Conclusion

To summarise, shareholders should always check that Vidhi Specialty Food Ingredients' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. It's great to see that Vidhi Specialty Food Ingredients is paying out a low percentage of its earnings and cash flow. 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. All things considered, Vidhi Specialty Food Ingredients looks like a strong prospect. At the right valuation, it could be something special.

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. For instance, we've picked out 2 warning signs for Vidhi Specialty Food Ingredients that investors should take into consideration.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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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