Should You Buy New Hoong Fatt Holdings Berhad (KLSE:NHFATT) For Its Upcoming Dividend?

New Hoong Fatt Holdings Berhad (KLSE:NHFATT) stock is about to trade ex-dividend in 3 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase New Hoong Fatt Holdings Berhad's shares before the 14th of March in order to receive the dividend, which the company will pay on the 8th of April.

The company's upcoming dividend is RM00.04 a share, following on from the last 12 months, when the company distributed a total of RM0.09 per share to shareholders. Based on the last year's worth of payments, New Hoong Fatt Holdings Berhad has a trailing yield of 4.6% on the current stock price of RM01.95. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for New Hoong Fatt Holdings Berhad

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. New Hoong Fatt Holdings Berhad paid out a comfortable 34% of its profit last year. A useful secondary check can be to evaluate whether New Hoong Fatt Holdings Berhad generated enough free cash flow to afford its dividend. Fortunately, it paid out only 42% of its free cash flow in the past year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit New Hoong Fatt Holdings Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see New Hoong Fatt Holdings Berhad has grown its earnings rapidly, up 24% a year for the past five years. New Hoong Fatt Holdings Berhad is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, New Hoong Fatt Holdings Berhad has lifted its dividend by approximately 5.1% a year on average. Earnings per share have been growing much quicker than dividends, potentially because New Hoong Fatt Holdings Berhad is keeping back more of its profits to grow the business.

To Sum It Up

From a dividend perspective, should investors buy or avoid New Hoong Fatt Holdings Berhad? It's great that New Hoong Fatt Holdings Berhad is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. New Hoong Fatt Holdings Berhad looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

In light of that, while New Hoong Fatt Holdings Berhad has an appealing dividend, it's worth knowing the risks involved with this stock. Case in point: We've spotted 2 warning signs for New Hoong Fatt Holdings Berhad you should be aware of.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.