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Want Growing Dividends? Here’s 1 Thing You Cannot Ignore

Slightly over two years ago on 16 January 2015, I wrote and published an article titled Investors, Beware These Big Dividend Yields.

In the article, I named four stocks with high dividend yields that I thought were risky. The quartet are Aspial Corporation (SGX: A30), Excelpoint Technology Ltd (SGX: BDF), Oxley Holdings Ltd (SGX: 5UX), and Tye Soon Ltd (SGX: BFU). Here’s how their dividend yields looked like back then:

Aspial, Excepoint Technology, Oxley, Tye Soon dividend yield table in 2015
Source: S&P Global Market Intelligence

In the name of Foolish accountability, I thought it would be interesting to see how the quartet’s dividends have changed.

Turns out, all four of them have seen their dividends shrink considerably, such that their yields-on-cost are now much lower as compared to what they were in my earlier article.

Aspial, Excepoint Technology, Oxley, Tye Soon yield on cost table in 2015
Source: S&P Global Market Intelligence

The reason why I initially thought the quartet’s dividends were at risk was because they couldn’t generate operating cash flow with any consistency. In Investors, Beware These Big Dividend Yields, I made a table that showed the problems with the four companies’ cash flows. I’ve reproduced it below:

Aspial, Excepoint Technology, Oxley, Tye Soon operating cash flow table
Source: S&P Global Market Intelligence

You can see that none of them had managed to generate positive operating cash flow for the timeframe I’m observing. This is how I described the importance of a company having positive operating cash flow in my aforementioned article:

“A company’s operating cash flow is simply the cash that its businesses have generated in any given time period. And since dividends are paid out with cash, it stands to reason that investors should keep a close watch on a company’s cash inflows in order to determine if there’s sufficient cash for outflows.

If a company’s business operations are not bringing in the cash, then it would have to depend on borrowings or the sale of shares in order to raise capital to fund its dividends. Neither options are particularly healthy as borrowings may impact the financial stability of the company while the sale of shares may dilute existing shareholders’ stakes in the firm.”

Having a history of negative operating cash flows does not mean a company would necessarily be a lousy dividend stock going forward. But, investors cannot ignore a company’s poor track record in generating operating cash flows if they’re out hunting for growing dividends. There better be a good reason why a company is unable to generate positive cash flows in a consistent manner.

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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.