Is Deswell Industries, Inc. (NASDAQ:DSWL) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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 Deswell Industries. It would not be a surprise to discover that many investors buy it for the dividends. Some simple research can reduce the risk of buying Deswell Industries for its dividend – read on to learn more.
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. Deswell Industries paid out 86% of its profit as dividends, over the trailing twelve month period. It’s paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Deswell Industries paid out a conservative 46% of its free cash flow as dividends last year. It’s positive to see that Deswell Industries’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
With a strong net cash balance, Deswell Industries investors may not have much to worry about in the near term from a dividend perspective.
Consider getting our latest analysis on Deswell Industries’s financial position here.
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 Deswell Industries’s dividend payments. Its dividend payments have declined on at least one occasion over the past ten years. During the past ten-year period, the first annual payment was US$0.40 in 2010, compared to US$0.16 last year. This works out to be a decline of approximately 8.8% per year over that time. Deswell Industries’s dividend hasn’t shrunk linearly at 8.8% per annum, but the CAGR is a useful estimate of the historical rate of change.
A shrinking dividend over a ten-year period is not ideal, and we’d be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.
Dividend Growth Potential
Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. It’s good to see Deswell Industries has been growing its earnings per share at 63% a year over the past five years. A majority of profits are being paid out as dividends, which raises the question of what happens to the current dividend if earnings decline. However, the rapid growth in earnings may indicate that is less of a risk.
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. Deswell Industries’s payout ratios are within a normal range for the average corporation, and we like that its cashflow was stronger than reported profits. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Overall we think Deswell Industries is an interesting dividend stock, although it could be better.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we’ve identified 3 warning signs for Deswell Industries that investors need to be conscious of moving forward.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned.
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