Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. REV Group, Inc. (NYSE:REVG) has paid a dividend to shareholders in the last few years. It currently yields 2.3%. Does REV Group tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
5 questions to ask before buying a dividend stock
When researching a dividend stock, I always follow the following screening criteria:
Does it pay an annual yield higher than 75% of dividend payers?
Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
Has dividend per share risen in the past couple of years?
Is its earnings sufficient to payout dividend at the current rate?
Will it have the ability to keep paying its dividends going forward?
Does REV Group pass our checks?
The current trailing twelve-month payout ratio for REVG is 98%, meaning the dividend is not sufficiently covered by its earnings. However, going forward, analysts expect REVG’s payout to fall into a more sustainable range of 14% of its earnings. Assuming a constant share price, this equates to a dividend yield of 2.3%. In addition to this, EPS should increase to $0.82, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When considering the sustainability of dividends, it is also worth checking the cash flow of a company. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. Unfortunately, it is really too early to view REV Group 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.
Compared to its peers, REV Group produces a yield of 2.3%, which is high for Machinery stocks but still below the market’s top dividend payers.
After digging a little deeper into REV Group’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 important factors you should further examine:
Future Outlook: What are well-informed industry analysts predicting for REVG’s future growth? Take a look at our free research report of analyst consensus for REVG’s outlook.
Valuation: What is REVG 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 REVG is currently mispriced by the market.
Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
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If you spot an error that warrants correction, please contact the editor at email@example.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.