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Does Evans Dixon Limited (ASX:ED1) Have A Place In Your Dividend Stock Portfolio?

Simply Wall St

Is Evans Dixon Limited (ASX:ED1) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. 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.

Some readers mightn't know much about Evans Dixon's 9.9% dividend, as it has only been paying distributions for a year or so. During the year, the company also conducted a buyback equivalent to around 4.6% of its market capitalisation. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on Evans Dixon!

ASX:ED1 Historical Dividend Yield, October 24th 2019

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. 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. In the last year, Evans Dixon paid out 106% of its profit as dividends. A payout ratio above 100% is definitely an item of concern, unless there are some other circumstances that would justify it.

Remember, you can always get a snapshot of Evans Dixon's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. With a payment history of less than 2 years, we think it's a bit too soon to think about living on the income from its dividend. This works out to a decline of approximately 20% over that time.

A shrinking dividend over a one-year period is not ideal, and we'd be concerned about investing in a dividend stock that lacks a solid record of growing dividends per share.

Dividend Growth Potential

Examining whether the dividend is affordable and stable is important. However, it's also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Evans Dixon's earnings per share have fallen -35% over the past year. This is a pretty serious concern, and it would be worth investigating whether something fundamental in the business has changed - or broken. We do note though, one year is too short a time to be drawing strong conclusions about a company's future prospects.

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. We're a bit uncomfortable with its high payout ratio. Second, earnings per share have been in decline, and the dividend history is shorter than we'd like. Using these criteria, Evans Dixon looks suboptimal from a dividend investment perspective.

See if management have their own wealth at stake, by checking insider shareholdings in Evans Dixon stock.

We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.

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 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. Thank you for reading.