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Should Deutsche Pfandbriefbank AG (ETR:PBB) Be Part Of Your Dividend Portfolio?

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Simply Wall St
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Dividend paying stocks like Deutsche Pfandbriefbank AG (ETR:PBB) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

In this case, Deutsche Pfandbriefbank likely looks attractive to dividend investors, given its 7.3% dividend yield and four-year payment history. It sure looks interesting on these metrics - but there's always more to the story . The company also bought back stock equivalent to around 1.1% of market capitalisation this year. There are a few simple ways to reduce the risks of buying Deutsche Pfandbriefbank for its dividend, and we'll go through these below.

Click the interactive chart for our full dividend analysis

XTRA:PBB Historical Dividend Yield, December 3rd 2019
XTRA:PBB Historical Dividend Yield, December 3rd 2019

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Deutsche Pfandbriefbank paid out 75% of its profit as dividends, over the trailing twelve month period. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

Consider getting our latest analysis on Deutsche Pfandbriefbank's financial position here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Deutsche Pfandbriefbank has been paying a dividend for the past four years. The company has been paying a stable dividend for a few years now, but we'd like to see more evidence of consistency over a longer period. During the past four-year period, the first annual payment was €0.43 in 2015, compared to €1.00 last year. Dividends per share have grown at approximately 23% per year over this time.

The dividend has been growing pretty quickly, which could be enough to get us interested even though the dividend history is relatively short. Further research may be warranted.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Deutsche Pfandbriefbank has grown its earnings per share at 2.2% per annum over the past five years. Earnings are not growing quickly at all, and the company is paying out most of its profit as dividends. When the rate of return on reinvestment opportunities falls below a certain minimum level, companies often elect to pay a larger dividend instead. This is why many mature companies often have larger dividend yields.

Conclusion

Dividend investors should always want to know if a) a company's dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Deutsche Pfandbriefbank's payout ratio is within normal bounds. Unfortunately, earnings growth has also been mediocre, and we think it has not been paying dividends long enough to demonstrate resilience across economic cycles. Deutsche Pfandbriefbank might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Companies that are growing earnings tend to be the best dividend stocks over the long term. See what the 7 analysts we track are forecasting for Deutsche Pfandbriefbank for free with public analyst estimates for the company.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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. Thank you for reading.