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Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. Duxton Water Limited (ASX:D2O) has started paying a dividend to shareholders. It currently trades on a yield of 3.6%. Let’s dig deeper into whether Duxton Water should have a place in your portfolio.
5 questions to ask before buying a dividend stock
Whenever I am looking at a potential dividend stock investment, I always check these five metrics:
- Is its annual yield among the top 25% of dividend-paying companies?
- Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
- Has the amount of dividend per share grown over the past?
- Does earnings amply cover its dividend payments?
- Based on future earnings growth, will it be able to continue to payout dividend at the current rate?
Does Duxton Water pass our checks?
Duxton Water has a trailing twelve-month payout ratio of 2.4%, which means that the dividend is covered by earnings. Going forward, analysts expect D2O’s payout to increase to 98% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 3.8%. However, EPS is forecasted to fall to A$0.053 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income. This also brings about uncertainty around the sustainability of the payout ratio.
When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.
If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Unfortunately, it is really too early to view Duxton Water as a dividend investment. Last year was the company’s first dividend payment, so it is certainly early days. The standard practice for reliable payers is to look for 10 or so years of track record.
In terms of its peers, Duxton Water produces a yield of 3.6%, which is high for Water Utilities stocks but still below the market’s top dividend payers.
After digging a little deeper into Duxton Water’s yield, it’s easy to see why you should be cautious investing in the company just 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, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. Below, I’ve compiled three important factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for D2O’s future growth? Take a look at our free research report of analyst consensus for D2O’s outlook.
- Historical Performance: What has D2O’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
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 firstname.lastname@example.org. 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.