Investors In Mercuries & Associates Holding, Ltd. (TPE:2905) Should Consider This, First

Today we'll take a closer look at Mercuries & Associates Holding, Ltd. (TPE:2905) 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. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With a goodly-sized dividend yield despite a relatively short payment history, investors might be wondering if Mercuries & Associates Holding is a new dividend aristocrat in the making. We'd agree the yield does look enticing. There are a few simple ways to reduce the risks of buying Mercuries & Associates Holding for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Mercuries & Associates Holding!

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. 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, Mercuries & Associates Holding paid out 56% of its profit as dividends. This is a fairly normal payout ratio among most businesses. It allows a higher dividend to be paid to shareholders, but does limit the capital retained in the business - which could be good or bad.

Remember, you can always get a snapshot of Mercuries & Associates Holding'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. Looking at the data, we can see that Mercuries & Associates Holding has been paying a dividend for the past five years. During the past five-year period, the first annual payment was NT$0.4 in 2016, compared to NT$0.9 last year. Dividends per share have grown at approximately 15% per year over this time. Mercuries & Associates Holding's dividend payments have fluctuated, so it hasn't grown 15% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

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

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Mercuries & Associates Holding's earnings per share have been essentially flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation.

We'd also point out that Mercuries & Associates Holding issued a meaningful number of new shares in the past year. Regularly issuing new shares can be detrimental - it's hard to grow dividends per share when new shares are regularly being created.

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. First, we think Mercuries & Associates Holding has an acceptable payout ratio. Earnings per share are down, and Mercuries & Associates Holding's dividend has been cut at least once in the past, which is disappointing. To conclude, we've spotted a couple of potential concerns with Mercuries & Associates Holding that may make it less than ideal candidate for dividend investors.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For example, we've picked out 3 warning signs for Mercuries & Associates Holding that investors should know about before committing capital to this stock.

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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