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Is This Share’s 6% Dividend Yield Too Good To Ignore?

When it comes to investing for dividends, a mistake that investors often commit is to look at a share’s yield alone.

It’s a mistake because a share’s yield tells us nothing about what’s really important – the safety and reliability of a share’s dividend.

Keeping these in mind, what should investors make of Aztech Group Ltd (SGX: 560)?

Based on its current share price of S$0.125, the mini-conglomerate (Aztech has its fingers in many different pies such as the sale of electronic products, supply of construction materials, and provision of marine logistics solutions) has an attractive trailing dividend yield of 6% based on its annual dividend of 0.75 Singapore cents for the fiscal year ended 2014.

In comparison, the SPDR STI ETF (SGX: ES3) has a yield of just 2.7% currently; the SPDR ST ETF is an exchange-traded fund which tracks the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

Traits of a good dividend share

When it comes to finding reliable dividends, there are a few things I like to look at:

1. A company’s track record in growing and paying its dividend.

This is important because it gives investors insight into management’s commitment to reward investors as the business grows. As New York University finance professor Aswath Damodaran once said, “Dividends are like getting married; stock buybacks are like hooking up.”

2. A company’s ability to grow its free cash flow over time and generate it in excess of the dividends paid.

Dividends are ultimately paid with the cash a company has. That cash can come from a few sources: Debt; issuing new shares; and/or the company’s daily business operations.

There are always exceptions, but it’s generally more sustainable for a company to pay its dividends using the cash generated from its businesses.

It thus follows that investors should be keeping an eye on a company’s free cash flow as it’s the cash flow from operations that’s left over after the firm has spent the necessary monies needed to maintain its businesses in their current state.

3. The strength of the company’s balance sheet.

A weak balance sheet that’s laden with debt puts a company’s dividend at risk from being cut or removed if there are even any slight hiccups in the business.

Having a strong balance sheet that is flush with cash and with little debt gives a company a buffer against tough times.

Pulling it all together

The chart below shows how Aztech Group fares against the three criteria:

Aztech's historical financials

Source: S&P Capital IQ

As you can probably tell, Aztech hasn’t scored well against the three criteria. The share has had a spotty track record with paying dividends over the decade ended 2014 (there were no dividends paid in 2011 and 2012) and hasn’t been able to generate consistent free cash flow.

Furthermore, Aztech has generally had a weak balance sheet that’s laden with debt. In recent years (between 2012 and 2014), the company’s balance sheet has even deteriorated significantly as seen by how the cash position has shrunk while debt is growing.

A Fool’s take

Given what we’ve seen so far, the only thing attractive about Aztech as an income stock is its high dividend yield – there’s much to be desired with the company’s financial figures.

But crucially, this isn’t a holistic view of the overall picture with Aztech. To arrive at a better conclusion on the company’s investing merits, investors should still spend time digging through the qualitative aspects of Aztech’s business and figure out if better days are ahead. Although a look back at history can be informative, investors should never invest purely by peering into the rearview mirror.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 company mentioned.