Is Contact Energy Limited (NZSE:CEN) A Good Dividend Stock?

Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Contact Energy Limited (NZSE:CEN) has returned to shareholders over the past 10 years, an average dividend yield of 5.00% annually. Should it have a place in your portfolio? Let’s take a look at Contact Energy in more detail. View out our latest analysis for Contact Energy

How I analyze a dividend stock

When researching a dividend stock, I always follow the following screening criteria:

• Is their annual yield among the top 25% of dividend payers?

• Has it paid dividend every year without dramatically reducing payout in the past?

• Has the amount of dividend per share grown over the past?

• Does earnings amply cover its dividend payments?

• Will it have the ability to keep paying its dividends going forward?

NZSE:CEN Historical Dividend Yield June 22nd 18

How does Contact Energy fare?

The company currently pays out 178.84% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is not sufficiently covered by its earnings. Going forward, analysts expect CEN’s payout to reduce to 136.45% of its earnings, which leads to a dividend yield of around 6.19%. However, EPS should increase to NZ$0.22, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. Dividend payments from Contact Energy have been volatile in the past 10 years, with some years experiencing significant drops of over 25%. These characteristics do not bode well for income investors seeking reliable stream of dividends.

Relative to peers, Contact Energy has a yield of 4.75%, which is on the low-side for Electric Utilities stocks.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in Contact Energy for the dividend. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. Given that this is purely a dividend analysis, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company’s fundamentals and underlying business before making an investment decision. Below, I’ve compiled three relevant factors you should look at:

1. Future Outlook: What are well-informed industry analysts predicting for CEN’s future growth? Take a look at our free research report of analyst consensus for CEN’s outlook.

2. Valuation: What is CEN worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether CEN is currently mispriced by the market.

3. Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.