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Is Cognizant Technology Solutions Corporation (NASDAQ:CTSH) A Smart Pick For Income Investors?

Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Cognizant Technology Solutions Corporation (NASDAQ:CTSH) has paid a dividend to shareholders in the last few years. It currently yields 1.2%. Should it have a place in your portfolio? Let’s take a look at Cognizant Technology Solutions in more detail.

Check out our latest analysis for Cognizant Technology Solutions

Here’s how I find good dividend stocks

If you are a dividend investor, you should always assess these five key metrics:

  • 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?
  • Is its earnings sufficient to payout dividend at the current rate?
  • Will it have the ability to keep paying its dividends going forward?
NasdaqGS:CTSH Historical Dividend Yield November 22nd 18

How well does Cognizant Technology Solutions fit our criteria?

The company currently pays out 31% 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 lower payout ratio of 16%, leading to a dividend yield of around 1.2%. However, EPS should increase to $4.2, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider 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 is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. Unfortunately, it is really too early to view Cognizant Technology Solutions as a dividend investment. It has only been consistently paying dividends for 2 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Relative to peers, Cognizant Technology Solutions produces a yield of 1.2%, which is on the low-side for IT stocks.

Next Steps:

After digging a little deeper into Cognizant Technology Solutions’s yield, it’s easy to see why you should be cautious investing in the company just for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. Below, I’ve compiled three pertinent factors you should look at:

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