Zooming in on TPE:8222's 3.7% Dividend Yield

Dividend paying stocks like Aero Win Technology Corporation (TPE:8222) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. 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.

In this case, Aero Win Technology likely looks attractive to dividend investors, given its 3.7% dividend yield and seven-year payment history. We'd agree the yield does look enticing. 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.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Although it reported a loss over the past 12 months, Aero Win Technology currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Unfortunately, while Aero Win Technology 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 Aero Win Technology'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. Aero Win Technology has been paying a dividend for the past seven years. It's good to see that Aero Win Technology 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 seven-year period, the first annual payment was NT$0.5 in 2014, compared to NT$0.5 last year. This works out to be a decline of approximately 1.5% per year over that time. Aero Win Technology's dividend hasn't shrunk linearly at 1.5% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Aero Win Technology for its dividend, given that payments have shrunk over the past seven years.

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? Aero Win Technology's EPS have fallen by approximately 25% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Aero Win Technology's earnings per share, which support the dividend, have been anything but stable.

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. Aero Win Technology's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. In this analysis, Aero Win Technology doesn't shape up too well as a dividend stock. We'd find it hard to look past the flaws, and would not be inclined to think of it as a reliable dividend-payer.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. 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 4 warning signs for Aero Win Technology (2 are concerning!) that you should be aware of before investing.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 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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