Are You An Income Investor? Don't Miss Out On Hengxin Technology Ltd. (HKG:1085)

Today we'll take a closer look at Hengxin Technology Ltd. (HKG:1085) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

Investors might not know much about Hengxin Technology's dividend prospects, even though it has been paying dividends for the last nine years and offers a 2.3% yield. A low yield is generally a turn-off, but if the prospects for earnings growth were strong, investors might be pleasantly surprised by the long-term results. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

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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. Hengxin Technology paid out 15% of its profit as dividends, over the trailing twelve month period. We'd say its dividends are thoroughly covered by earnings.

We also measure dividends paid against a company's levered free cash flow, to see if enough cash was generated to cover the dividend. Hengxin Technology's cash payout ratio last year was 11%, which is quite low and suggests that the dividend was thoroughly covered by cash flow. It's positive to see that Hengxin Technology'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, Hengxin Technology investors may not have much to worry about in the near term from a dividend perspective.

Consider getting our latest analysis on Hengxin Technology's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. The first recorded dividend for Hengxin Technology, in the last decade, was nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was CN¥0.044 in 2011, compared to CN¥0.046 last year. Dividend payments have grown at less than 1% a year over this period.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

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. Hengxin Technology has grown its earnings per share at 8.9% per annum over the past five years. With a decent amount of growth and a low payout ratio, we think this bodes well for Hengxin Technology's prospects of growing its dividend payments in the future.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. It's great to see that Hengxin Technology is paying out a low percentage of its earnings and cash flow. 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. All things considered, Hengxin Technology looks like a strong prospect. At the right valuation, it could be something special.

Now, if you want to look closer, it would be worth checking out our free research on Hengxin Technology management tenure, salary, and performance.

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 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.