Does Yung Chi Paint & Varnish Mfg.Co.,Ltd (TPE:1726) Have A Place In Your Dividend Stock Portfolio?

Today we'll take a closer look at Yung Chi Paint & Varnish Mfg.Co.,Ltd (TPE:1726) 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. If you are hoping to live on your dividends, it's important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you'll find our analysis useful.

A high yield and a long history of paying dividends is an appealing combination for Yung Chi Paint & Varnish Mfg.Co.Ltd. We'd guess that plenty of investors have purchased it for the income. Some simple analysis can reduce the risk of holding Yung Chi Paint & Varnish Mfg.Co.Ltd for its dividend, and we'll focus on the most important aspects below.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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, Yung Chi Paint & Varnish Mfg.Co.Ltd paid out 63% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Yung Chi Paint & Varnish Mfg.Co.Ltd paid out 219% of its free cash flow last year, which we think is concerning if cash flows do not improve. Paying out such a high percentage of cash flow suggests that the dividend was funded from either cash at bank or by borrowing, neither of which is desirable over the long term. Yung Chi Paint & Varnish Mfg.Co.Ltd paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Yung Chi Paint & Varnish Mfg.Co.Ltd's ability to maintain its dividend.

With a strong net cash balance, Yung Chi Paint & Varnish Mfg.Co.Ltd investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Yung Chi Paint & Varnish Mfg.Co.Ltd every 24 hours, so you can always get our latest analysis of its financial health, here.

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 Yung Chi Paint & Varnish Mfg.Co.Ltd's dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past 10-year period, the first annual payment was NT$2.5 in 2011, compared to NT$3.2 last year. This works out to be a compound annual growth rate (CAGR) of approximately 2.5% a year over that time.

Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Over the past five years, it looks as though Yung Chi Paint & Varnish Mfg.Co.Ltd's EPS have declined at around 3.2% a year. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

To summarise, shareholders should always check that Yung Chi Paint & Varnish Mfg.Co.Ltd's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Yung Chi Paint & Varnish Mfg.Co.Ltd has an acceptable payout ratio, although its dividend was not well covered by cashflow. Moreover, earnings have been shrinking. While the dividends have been fairly steady, we'd wonder for how much longer this will be sustainable if earnings continue to decline. With this information in mind, we think Yung Chi Paint & Varnish Mfg.Co.Ltd may not be an ideal dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. For instance, we've picked out 1 warning sign for Yung Chi Paint & Varnish Mfg.Co.Ltd that investors should take into consideration.

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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