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Is Buying Discover Financial Services (NYSE:DFS) For Its Upcoming US$0.40 Dividend A Good Choice?

Yolanda Lovett

Attention dividend hunters! Discover Financial Services (NYSE:DFS) will be distributing its dividend of US$0.40 per share on the 06 September 2018, and will start trading ex-dividend in 2 days time on the 22 August 2018. Is this future income stream a compelling catalyst for dividend investors to think about the stock as an investment today? Let’s take a look at Discover Financial Services’s most recent financial data to examine its dividend characteristics in more detail.

View our latest analysis for Discover Financial Services

5 checks you should do on a dividend stock

When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:

  • Is it the top 25% annual dividend yield payer?
  • Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
  • Has it increased its dividend per share amount over the past?
  • Is its earnings sufficient to payout dividend at the current rate?
  • Will the company be able to keep paying dividend based on the future earnings growth?
NYSE:DFS Historical Dividend Yield August 19th 18

How well does Discover Financial Services fit our criteria?

The company currently pays out 22.25% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting lower payout ratio of 18.74%, leading to a dividend yield of 2.07%. However, EPS should increase to $8.21, 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. Although DFS’s per share payments have increased in the past 10 years, it has not been a completely smooth ride. Shareholders would have seen a few years of reduced payments in this time.

Compared to its peers, Discover Financial Services has a yield of 2.05%, which is high for Consumer Finance stocks but still below the market’s top dividend payers.

Next Steps:

Taking into account the dividend metrics, Discover Financial Services ticks most of the boxes as a strong dividend investment, putting it in my list of top dividend payers. 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 essential factors you should look at:

  1. Future Outlook: What are well-informed industry analysts predicting for DFS’s future growth? Take a look at our free research report of analyst consensus for DFS’s outlook.
  2. Valuation: What is DFS 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 DFS is currently mispriced by the market.
  3. Other 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.