Key Things To Watch Out For If You Are After SH Group (Holdings) Limited's (HKG:1637) 3.9% Dividend

Could SH Group (Holdings) Limited (HKG:1637) 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.

SH Group (Holdings) pays a 3.9% dividend yield, and has been paying dividends for the past two years. A high yield probably looks enticing, but investors are likely wondering about the short payment history. Some simple research can reduce the risk of buying SH Group (Holdings) for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on SH Group (Holdings)!

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. 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. In the last year, SH Group (Holdings) paid out 17% of its profit as dividends. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Last year, SH Group (Holdings) paid a dividend while reporting negative free cash flow. While there may be an explanation, we think this behaviour is generally not sustainable.

With a strong net cash balance, SH Group (Holdings) investors may not have much to worry about in the near term from a dividend perspective.

Remember, you can always get a snapshot of SH Group (Holdings)'s latest financial position, by checking our visualisation of its financial health.

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. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past two-year period, the first annual payment was HK$0.022 in 2018, compared to HK$0.014 last year. Dividend payments have fallen sharply, down 36% over that time.

A shrinking dividend over a two-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. SH Group (Holdings)'s earnings per share have been essentially flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation. So, we know earnings growth has been thin on the ground. On the plus side, the dividend payout ratio is low and dividends could grow faster than earnings, if the company decides to increase its payout ratio.

Conclusion

To summarise, shareholders should always check that SH Group (Holdings)'s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. SH Group (Holdings) has a low payout ratio, which we like, although it paid out virtually all of its generated cash. Unfortunately, the company has not been able to generate earnings growth, and cut its dividend at least once in the past. Ultimately, SH Group (Holdings) 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.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in SH Group (Holdings) stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.