Is It Worth Buying Chemung Financial Corporation (NASDAQ:CHMG) For Its 2.4% Dividend Yield?

Today we'll take a closer look at Chemung Financial Corporation (NASDAQ:CHMG) 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.

A slim 2.4% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Chemung Financial could have potential. The company also bought back stock during the year, equivalent to approximately 3.2% of the company's market capitalisation at the time. That said, the recent jump in the share price will make Chemung Financial's dividend yield look smaller, even though the company prospects could be improving. Some simple research can reduce the risk of buying Chemung Financial for its dividend - read on to learn more.

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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. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Chemung Financial paid out 21% of its profit as dividends, over the trailing twelve month period. We'd say its dividends are thoroughly covered by earnings.

We update our data on Chemung Financial 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. Chemung Financial 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 stable over the past 10 years, which is great. We think this could suggest some resilience to the business and its dividends. During the past 10-year period, the first annual payment was US$1.0 in 2011, compared to US$1.0 last year. Its dividends have grown at less than 1% per annum over this time frame.

Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think is seriously impressive.

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. It's good to see Chemung Financial has been growing its earnings per share at 19% a year over the past five years. Earnings per share are growing at a solid clip, and the payout ratio is low. We think this is an ideal combination in a dividend stock.

Conclusion

To summarise, shareholders should always check that Chemung Financial'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 Chemung Financial has a low payout ratio, as this suggests earnings are being reinvested in the business. Next, growing earnings per share and steady dividend payments is a great combination. Chemung Financial fits all of our criteria, and we think there are a lot of positives to it from a dividend perspective.

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 instance, we've picked out 1 warning sign for Chemung Financial 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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