Is Omni Bridgeway Limited (ASX:OBL) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

A slim 1.8% yield is hard to get excited about, but the long payment history is respectable. At the right price, or with strong growth opportunities, Omni Bridgeway could have potential. Some simple analysis can reduce the risk of holding Omni Bridgeway for its dividend, and we'll focus on the most important aspects below.

Click the interactive chart for our full dividend analysis  ASX:OBL Historical Dividend Yield April 3rd 2020

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. While Omni Bridgeway pays a dividend, it reported a loss over the last year. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.

Remember, you can always get a snapshot of Omni Bridgeway's latest financial position,  by checking our visualisation of its financial health.

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. For the purpose of this article, we only scrutinise the last decade of Omni Bridgeway's dividend payments. During the past ten-year period, the first annual payment was AU$0.20 in 2010, compared to AU$0.06 last year. Dividend payments have fallen sharply, down 70% over that time.

We struggle to make a case for buying Omni Bridgeway for its dividend, given that payments have shrunk over the past ten years.



Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. Omni Bridgeway's EPS have fallen by approximately 56% per year during the past five years. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

We'd also point out that Omni Bridgeway issued a meaningful number of new shares in the past year. Trying to grow the dividend when issuing new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill. Companies that consistently issue new shares are often suboptimal from a dividend perspective.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. First, it's not great to see a dividend being paid despite the company being unprofitable over the last year. In short, we're not keen on Omni Bridgeway from a dividend perspective. Businesses can change, but we've spotted a few too many concerns with this one to get comfortable.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for Omni Bridgeway that investors need to be conscious of moving forward.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

If you spot an error that warrants correction, please contact the editor at [email protected]. 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.

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. Thank you for reading.