This Is 1 Share That Could Give You Solid and Growing Dividends

Real estate fund manager ARA Asset Management Limited (SGX: D1R) isn’t the type of stock which would catch the eye of investors who are out looking for high dividend yields.

Thanks to its annual dividend of S$0.05 per share in 2014, ARA Asset Management has a historical yield of just 2.8% at its current price of S$1.765. This is right in line with the 2.8% yield that’s also offered by the SPDR STI ETF (SGX: ES3), an exchange-traded fund tracking Singapore’s market barometer the Straits Times Index (SGX: ^STI).

But despite merely having an average yield at the moment, ARA Asset Management may just be a share that can eventually please even the most hard-to-please income investors by virtue of its potential in being able to deliver growing dividends in the years ahead.

Building blocks for a solid and growing dividend

There are a few things in general that I like to investigate about a company when I’m trying to determine if it has the ability to pay out dividends that can rise steadily over time:

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

This criterion’s importance lies in the insight it can give investors about management’s commitment to reward shareholders as the business grows.

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

Ultimately, a company pays its dividends with the cash it has and that cash can from a few sources. A company can 1) take on debt, 2) issue new shares, 3) sell its assets, and/or 4) generate cash from its daily business activities.

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

It thus follows that investors should be keeping a close watch on a company’s free cash flow as it is the actual cash flow from operations that’s left after the firm has spent the necessary capital needed to maintain its businesses at their current state. The higher the company’s free cash flow can be over time, the larger the potential for growing dividends.

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

When a company has a weak balance sheet that’s laden with debt, its dividends can be at risk of being reduced or removed – either due to pressure from creditors or from a simple lack of cash – even at the slightest hiccup in the fortunes of its business.

On the other hand, a strong balance sheet that is flush with cash gives a company the resources to protect its dividends during the inevitable tough times that rolls along every now and then.

Making sense of it all

Here are two charts showing how ARA Asset Management has fared against the three criteria since 2007 (a longer track-record isn’t shown because the company got listed only in November that year):

ARA Asset Management's total dividends and free cash flow (FCF) per share

ARA Asset Management's balance sheet figures

Source: S&P Capital IQ

What we can glean from the charts can be summarised in seven words: ARA Asset Management has done really well.

Besides having a dividend that was either increased or maintained in the years under study, the firm’s free cashflows have also grown steadily over time and have come in higher than the dividends paid for the most part.

Meanwhile, ARA Asset Management’s balance sheet is like a fortress with cash consistently coming in higher than debt. That said, there’s a little snag in that the net-cash position (total cash minus total borrowings) has decreased over the past few years and that might be something for investors to keep their eyes on.

A Fool’s take

There’re many things to like about ARA Asset Management as a share with the potential to dish out solid and growing dividends in the future. But, it’s worth noting that this look at the real estate fund manager’s historical financials is not a holistic overview of the entire picture.

Investors would still need to investigate the qualitative aspects of the company’s business and consider the firm’s ability to grow. A study of ARA Asset Management’s financial track record is important and informative, but more work needs to be done beyond that before any investing decision can be reached.

For more analyses and insights on dividend investing, as well as important updates about Singapore's stock market, sign up for 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 companies mentioned.