Is LUZHENG FUTURES Company Limited (HKG:1461) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With a four-year payment history and a 7.6% yield, many investors probably find LUZHENG FUTURES intriguing. It sure looks interesting on these metrics - but there's always more to the story . Some simple research can reduce the risk of buying LUZHENG FUTURES for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 85% of LUZHENG FUTURES's profits were paid out as dividends in the last 12 months. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

Consider getting our latest analysis on LUZHENG FUTURES's financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the data, we can see that LUZHENG FUTURES has been paying a dividend for the past four years. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past four-year period, the first annual payment was CN¥0.043 in 2015, compared to CN¥0.055 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.3% a year over that time.

LUZHENG FUTURES has been growing its dividend at a decent rate, and the payments have been stable despite the short payment history. This is a positive start.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. It's not great to see that LUZHENG FUTURES's have fallen at approximately 9.3% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

To summarise, shareholders should always check that LUZHENG FUTURES's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think LUZHENG FUTURES has an acceptable payout ratio. Earnings per share have been falling, and the company has a relatively short dividend history - shorter than we like, anyway. To conclude, we've spotted a couple of potential concerns with LUZHENG FUTURES that may make it less than ideal candidate for dividend investors.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in LUZHENG FUTURES stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.