How Does Deswell Industries, Inc. (NASDAQ:DSWL) Fare As A Dividend Stock?

Today we'll take a closer look at Deswell Industries, Inc. (NASDAQ:DSWL) 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 popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

In this case, Deswell Industries likely looks attractive to investors, given its 6.2% dividend yield and a payment history of over ten years. It would not be a surprise to discover that many investors buy it for the dividends. Some simple analysis can reduce the risk of holding Deswell Industries for its dividend, and we'll focus on the most important aspects below.

Explore this interactive chart for our latest analysis on Deswell Industries!

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 Deswell Industries pays a dividend, it was loss-making during the past year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Deswell Industries paid out 20% of its free cash flow as dividends last year, which is conservative and suggests the dividend is sustainable.

While the above analysis focuses on dividends relative to a company's earnings, we do note Deswell Industries' strong net cash position, which will let it pay larger dividends for a time, should it choose.

We update our data on Deswell Industries 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. For the purpose of this article, we only scrutinise the last decade of Deswell Industries' dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was US$0.2 in 2010, compared to US$0.2 last year. The dividend has shrunk at around 1.0% a year during that period. Deswell Industries' dividend hasn't shrunk linearly at 1.0% per annum, but the CAGR is a useful estimate of the historical rate of change.

We struggle to make a case for buying Deswell Industries for its dividend, given that payments have shrunk over the past 10 years.

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 Deswell Industries has grown its earnings per share at 27% per annum over the past five years.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. We're not keen on the fact that Deswell Industries paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. Ultimately, Deswell Industries comes up short on our dividend analysis. It's not that we think it is a bad company - just that there are likely more appealing dividend prospects out there on this analysis.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 2 warning signs for Deswell Industries that investors need to be conscious of moving forward.

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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