Read This Before Buying Ajmera Realty & Infra India Limited (NSE:AJMERA) For Its Dividend

Is Ajmera Realty & Infra India Limited (NSE:AJMERA) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

A 1.2% yield is nothing to get excited about, but investors probably think the long payment history suggests Ajmera Realty & Infra India has some staying power. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Explore this interactive chart for our latest analysis on Ajmera Realty & Infra India!

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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, Ajmera Realty & Infra India paid out 23% of its profit as dividends. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Unfortunately, while Ajmera Realty & Infra India pays a dividend, it also reported negative free cash flow last year. While there may be a good reason for this, it's not ideal from a dividend perspective.

Remember, you can always get a snapshot of Ajmera Realty & Infra India'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 Ajmera Realty & Infra India's dividend payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was ₹1.1 in 2011, compared to ₹1.4 last year. Dividends per share have grown at approximately 2.4% per year over this time. The dividends haven't grown at precisely 2.4% every year, but this is a useful way to average out the historical rate of growth.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

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? Over the past five years, it looks as though Ajmera Realty & Infra India's EPS have declined at around 10% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Ajmera Realty & Infra India's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that Ajmera Realty & Infra India's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Ajmera Realty & Infra India has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Earnings per share are down, and Ajmera Realty & Infra India's dividend has been cut at least once in the past, which is disappointing. With this information in mind, we think Ajmera Realty & Infra India may not be an ideal dividend stock.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 6 warning signs for Ajmera Realty & Infra India (2 shouldn't be ignored!) that you should be aware of before investing.

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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