Tachia Yung Ho Machine Industry Co., Ltd. (GTSM:2221) Investors Should Think About This Before Buying It For Its Dividend

Today we'll take a closer look at Tachia Yung Ho Machine Industry Co., Ltd. (GTSM:2221) 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. 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.

In this case, Tachia Yung Ho Machine Industry likely looks attractive to dividend investors, given its 6.3% dividend yield and nine-year payment history. We'd agree the yield does look enticing. Some simple research can reduce the risk of buying Tachia Yung Ho Machine Industry for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Tachia Yung Ho Machine Industry!

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. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Tachia Yung Ho Machine Industry paid out 102% of its profit as dividends. Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a payout ratio of above 100% is definitely a concern.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Tachia Yung Ho Machine Industry paid out 95% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Cash is slightly more important than profit from a dividend perspective, but given Tachia Yung Ho Machine Industry's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Remember, you can always get a snapshot of Tachia Yung Ho Machine Industry's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the last decade of data, we can see that Tachia Yung Ho Machine Industry paid its first dividend at least nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was NT$1.3 in 2012, compared to NT$1.5 last year. This works out to be a compound annual growth rate (CAGR) of approximately 1.6% 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.

Modest growth in the dividend is good to see, but we think this is offset by historical cuts to the payments. It is hard to live on a dividend income if the company's earnings are not consistent.

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. Earnings have grown at around 7.6% a year for the past five years, which is better than seeing them shrink! Although per-share earnings are growing at a credible rate, virtually all of the income is being paid out as dividends to shareholders. This is okay, but may limit growth in the company's future dividend payments.

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. We're a bit uncomfortable with Tachia Yung Ho Machine Industry paying out a high percentage of both its cashflow and earnings. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. There are a few too many issues for us to get comfortable with Tachia Yung Ho Machine Industry from a dividend perspective. Businesses can change, but we would struggle to identify why an investor should rely on this stock for their income.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. As an example, we've identified 3 warning signs for Tachia Yung Ho Machine Industry that you should be aware of before investing.

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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