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Dividend paying stocks like INEOS Styrolution India Limited (NSE:INEOSSTYRO) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

Investors might not know much about INEOS Styrolution India's dividend prospects, even though it has been paying dividends for the last nine years and offers a 0.4% yield. A 0.4% yield is not inspiring, but the longer payment history has some appeal. There are a few simple ways to reduce the risks of buying INEOS Styrolution India for its dividend, and we'll go through these below.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. While INEOS Styrolution India pays a dividend, it reported a loss over the last year. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

Consider getting our latest analysis on INEOS Styrolution India's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. Looking at the last decade of data, we can see that INEOS Styrolution India paid its first dividend at least nine years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once by more than 20%, and we're cautious about the consistency of its dividend across a full economic cycle. During the past nine-year period, the first annual payment was ₹3.50 in 2010, compared to ₹2.00 last year. This works out to be a decline of approximately 6.0% per year over that time. INEOS Styrolution India's dividend has been cut sharply at least once, so it hasn't fallen by 6.0% every year, but this is a decent approximation of the long term change.

We struggle to make a case for buying INEOS Styrolution India for its dividend, given that payments have shrunk over the past nine years.

Dividend Growth Potential

Given that dividend payments have been shrinking like a glacier in a warming world, we need to check if there are some bright spots on the horizon. INEOS Styrolution India has grown its earnings per share at 3.6% per annum over the past five years. INEOS Styrolution India is paying out less than half of its earnings, which we like. Earnings per share growth have grown slowly, which is not great, but if the retained earnings can be reinvested effectively, future growth may be stronger.

Conclusion

To summarise, shareholders should always check that INEOS Styrolution India's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're not keen on the fact that INEOS Styrolution India paid dividends despite reporting a loss over the past year, although fortunately its dividend was covered by cash flow. Second, earnings growth has been ordinary, and its history of dividend payments is chequered - having cut its dividend at least once in the past. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than INEOS Styrolution India out there.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in INEOS Styrolution India 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.