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Is South32 Limited (ASX:S32) A Smart Choice For Dividend Investors?

Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. South32 Limited (ASX:S32) has recently paid dividends to shareholders, and currently yields 4.2%. Should it have a place in your portfolio? Let’s take a look at South32 in more detail.

Check out our latest analysis for South32

Here’s how I find good dividend stocks

Whenever I am looking at a potential dividend stock investment, I always check these five metrics:

  • Is it paying an annual yield above 75% of dividend payers?

  • Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?

  • Has it increased its dividend per share amount over the past?

  • Can it afford to pay the current rate of dividends from its earnings?

  • Will the company be able to keep paying dividend based on the future earnings growth?

ASX:S32 Historical Dividend Yield October 29th 18
ASX:S32 Historical Dividend Yield October 29th 18

How does South32 fare?

The company currently pays out 41% of its earnings as a dividend, according to its trailing twelve-month data, which means that the dividend is covered by earnings. In the near future, analysts are predicting a higher payout ratio of 52%, leading to a dividend yield of 5.3%. Moreover, EPS should increase to $0.31. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.

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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 there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. The reality is that it is too early to consider South32 as a dividend investment. It has only been consistently paying dividends for 3 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

In terms of its peers, South32 produces a yield of 4.2%, which is on the low-side for Metals and Mining stocks.

Next Steps:

Whilst there are few things you may like about South32 from a dividend stock perspective, the truth is that overall it probably is not the best choice for a dividend investor. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. 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. There are three essential factors you should look at:

  1. Future Outlook: What are well-informed industry analysts predicting for S32’s future growth? Take a look at our free research report of analyst consensus for S32’s outlook.

  2. Valuation: What is S32 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 S32 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.