How safe is Xinte Energy Co’s dividend?

Given the uncertain economic outlook, it is difficult to assess whether previous dividend forecasts are still useful. Still, dividend payouts are a critical part of the return investors get from owning stocks over time, and investors aren’t wrong to look for stocks that can reliably pay a large dividend.

Beyond providing income, dividends are also a signal that a company is well funded and well managed. Today I will use Xinte Energy Co (HKG:1799) as to what to look for when it comes to dividend data.

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Rules for finding reliable dividend payers

1. Security of dividends

Attractive high yields obviously turn heads – but it’s important to know that a dividend is affordable, especially in times when saving money is a must. Dividend coverage (similar to payout ratio) is a benchmark measure of a company’s net income relative to the dividend paid to shareholders. It is calculated as earnings per share divided by dividend per share and helps indicate how sustainable a dividend is.

Dividend coverage of less than 1x suggests the company cannot fund the payment from its current year earnings – and could rely on other sources of funds to pay it.

2. High (but not excessive) dividend yield

Dividend yield is an important financial metric because it tells you the percentage of the amount a company pays out in dividends each year relative to its stock price. This makes it easy to compare dividend payouts across the market and against competitors.

High yields are obviously attractive, but be careful of yields that are too high as they can be a sign of underlying problems. When the market suspects that a company is unable to maintain its dividend, the stock price drops, pushing the yield higher. Generally, a dividend yield of 10% or higher is a signal that a dividend may be too good to be true.

3. Dividend Growth

Another important marker for assessing the reliability of a dividend is a history of dividend growth – which can usually be used as evidence that growth will continue. Steady dividend growth may indicate that companies are carefully managing their distribution policies and rewarding their shareholders over time. Rather than aggressively distributing earnings, dividend-growing companies tend to have more modest returns, but are more apt to maintain their payouts.

What does this mean for potential investors?

Yield, growth and security are the three main pillars that underpin some of the most popular dividend investing strategies. But it is important to know that dividend payments can be reduced or canceled very quickly when the outlook changes.

To better understand the dividend outlook for any stock, it’s important to do some research yourself. Indeed, we have identified areas of concern with Xinte Energy Co which you can read about here.

About Tina G.

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