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Can This Share Be A Great Dividend Play?

Credit: Simon Cunningham

Dividends can be a fantastic source of income for investors. If selected well, the shares you own might even be able to pay dividends which climb steadily upward over time.

But, what does it mean to “select well”? I’m glad you asked. Here’re three things you can look at which can help separate the wheat from the chaff:

  1. A company’s track record in growing its dividend. This is important because it gives investors insight regarding management’s commitment to reward shareholders as a company grows.
  2. A company’s ability to grow its free cash flow and generate it in excess of the dividends paid. Dividends are ultimately paid out through the cash that a company has, and so, it makes sense for investors to keep an eye on the firm’s free cash flow. The financial metric is simply the amount of cash that’s generated by a company after all the necessary reinvestments are made to maintain its business at the current state. While there are certainly exceptions, it’s generally more sustainable for a company to be funding its dividends using mainly cash that’s generated from its daily business operations.
  3. The strength of the company’s balance sheet. Companies with weak balance sheets that are laden with debt run higher risks of having to cut their dividends when the general business climate cools. In this sense, a strong balance sheet helps protect a company’s dividend by giving the firm room for error.

Keeping these criteria in mind, Straco Corporation Ltd (SGX: S85), an owner of tourist attractions in Singapore and China, seems to be a share that fits the bill.

Straco's financials

Source: S& Capital IQ

From the chart above, it’s easy to see how Straco has delivered growing dividends since initiating its first-ever payout in 2006. In addition, the firm has also been generating free cash flow in excess of its dividends paid in each calendar year since its listing in 2004. Straco’s balance sheet has also been rock-solid, having been debt-free since 2008.

A Fool’s take

Judging from its stellar finances alone, there’s a strong case to be made for Straco’s attractiveness as an income share. The company’s historical dividend yield of 2.8% (based on its dividend for 2013 and its current share price of S$0.725) also compares favourably against that of the market average – the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market benchmark the Straits Times Index (SGX: ^STI), carries a yield of 2.64% currently – and that’s another plus point.

But, this isn’t a holistic picture. Investors would also have to consider the qualitative aspects of Straco’s business (these considerations can include Straco’s growth opportunities, competitive strengths and weaknesses, and key risks). Only then can investors arrive at a better conclusion on Straco’s investment merits.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.