Key Insights Investors Should Know About This High-Yielding Stock’s Dividend

Vehicle inspection and testing outfit Vicom Limited (SGX: V01) can be considered to be a stock with a market-beating yield.

At its current price of S$6.13, it has a yield of 4.4% thanks to its annual dividend of S$0.27 per share in 2014. In contrast, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund mimicking the fundamentals of the Straits Times Index (SGX: ^STI) – has a yield of 3.2% at the moment.

Let’s have a look at two charts which can give us some important insights about Vicom’s dividend.

The first chart shows us the history of Vicom’s annual dividends over the decade from 2004 to 2014:

Chart 1 - Vicom's total (ordinary + special) dividends

Source: S&P Capital IQ

A few key takeaways can be found. Firstly, the company has been able to consistently pay an annual dividend in each year over the period under study. Secondly, while Vicom has not increased its divided in each year, there’s still an unmistakable upward climb in its payouts; to that point, the inspection and testing company’s dividend had risen from S$0.0575 per share in 2004 to S$0.27 in 2014.

These traits which Vicom displays can give investors some confidence in the firm’s ability to carry on paying a dividend in the years ahead.

The second chart illustrates Vicom’s payout ratios over the same period as Chart 1 and can give us some clues on the amount of dividend the company can dish out going forward:

Chart 2 - Vicom's payout ratios

Source: S&P Capital IQ

Payout ratios (dividends as a percentage of profit and dividends as a percentage of free cash flow) can give us an idea of how much room for error a company has to maintain or grow its dividend in the future. In general, a low ratio would correspond to having larger room to handle the vicissitudes of life and the business environment.

Vicom’s payout ratios are not the lowest (in 2014, its dividend was 79% and 73% of its earnings and free cash flow, respectively), but those aren’t egregiously high figures. The steady nature of the firm’s business – Vicom’s revenue and profit had grown in each year over the decade ended 2014 – may help lessen the risk of high payout ratios too.

In sum, Vicom’s strong dividend track record is something to like. But, its high payout ratios may be a risk that’s worth keeping an eye on despite the strength of its business helping to mitigate some of the danger.

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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 owns shares in Vicom.