Does Rectron Limited (TPE:2302) Have A Place In Your Dividend Portfolio?

Could Rectron Limited (TPE:2302) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the 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.

A 1.4% yield is nothing to get excited about, but investors probably think the long payment history suggests Rectron has some staying power. There are a few simple ways to reduce the risks of buying Rectron for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Rectron!

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, Rectron paid out 47% of its profit as dividends. A medium payout ratio strikes a good balance between paying dividends, and keeping enough back to invest in the business. Plus, there is room to increase the payout ratio over time.

With a strong net cash balance, Rectron investors may not have much to worry about in the near term from a dividend perspective.

We update our data on Rectron every 24 hours, so you can always get our latest analysis of its financial health, here.

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. Rectron has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was NT$0.05 in 2011, compared to NT$0.3 last year. This works out to be a compound annual growth rate (CAGR) of approximately 20% a year over that time. Rectron's dividend payments have fluctuated, so it hasn't grown 20% 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. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Rectron has grown its earnings per share at 84% per annum over the past five years. With high earnings per share growth in recent times and a modest payout ratio, we think this is an attractive combination if earnings can be reinvested to generate further growth.

Conclusion

To summarise, shareholders should always check that Rectron's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're glad to see Rectron has a low payout ratio, as this suggests earnings are being reinvested in the business. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Rectron fits all of our criteria, and we think there are a lot of positives to it from a dividend perspective.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Rectron stock.

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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