Dongyue Group Limited (HKG: 189) dividend will increase to HK$0.34 on July 15. Despite this increase, the 3.6% dividend yield is only a modest increase in shareholder return.

See our latest analysis for Dongyue Group

Dongyue Group revenue easily covers distributions

It would be nice if the yield was higher, but we should also check whether higher levels of dividend payments would be sustainable. Based on the last payout, Dongyue Group was earning enough to cover the dividend, but free cash flow was not positive. In general, we consider cash flow to be more important than earnings, so we would be cautious before relying on the sustainability of this dividend.

Looking ahead, earnings per share are expected to increase 53.0% over the next year. If the dividend continues on this path, the payout ratio could be 28% by next year, which we believe can be quite sustainable in the future.

Dividend volatility

The company’s dividend history has been marked by instability, with at least 1 cut in the past 10 years. The dividend increased from CN¥0.32 in 2012 to the most recent annual payment of CN¥0.28. The dividend decreased by approximately 1.6% per year during this period. A company that decreases its dividend over time is generally not what we are looking for.

The dividend should increase

With a relatively unstable dividend, it is even more important to see if earnings per share increase. Dongyue Group has impressed us by increasing EPS by 27% annually over the past five years. Earnings per share are growing at a steady pace and the payout ratio is low, which we believe is an ideal combination in a dividend-paying stock, as the company can quite easily increase the dividend in the future.

Our Thoughts on the Dongyue Group Dividend

Overall, we still like to see the dividend increase, but we don’t think Dongyue Group will make a big income stock. With no cash flow, it’s hard to see how the company can sustain a dividend payment. We would be a bit cautious to rely on this stock primarily for dividend income.

Companies with a stable dividend policy are likely to enjoy greater investor interest than those that suffer from a more inconsistent approach. Yet investors must consider a host of other factors, aside from dividend payments, when analyzing a company. Example: we have identified 3 Warning Signs for Dongyue Group (1 of which is potentially serious!) that you should know about. Isn’t Dongyue Group quite the opportunity you were looking for? Why not check out our selection of the best dividend stocks.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.