Dividend paying stocks like First Northwest Bancorp (NASDAQ:FNWB) 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. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.
Some readers mightn't know much about First Northwest Bancorp's 0.9% dividend, as it has only been paying distributions for a year or so. The company also bought back stock equivalent to around 5.3% of market capitalisation this year. Some simple analysis can reduce the risk of holding First Northwest Bancorp for its dividend, and we'll focus on the most important aspects below.
Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, First Northwest Bancorp paid out 13% of its profit as dividends. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.
Remember, you can always get a snapshot of First Northwest Bancorp's latest financial position, by checking our visualisation of its financial health.
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 be a compound annual growth rate (CAGR) of approximately 33% a year over that time.
We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.
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. Over the long term, dividends need to grow at or above the rate of inflation, in order to maintain the recipient's purchasing power. It's good to see First Northwest Bancorp has been growing its earnings per share at 32% a year over the past three years. The company is only paying out a fraction of its earnings as dividends, and in the past been able to use the retained earnings to grow its profits rapidly - an ideal combination.
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 glad to see First Northwest Bancorp has a low payout ratio, as this suggests earnings are being reinvested in the business. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. Overall we think First Northwest Bancorp is an interesting dividend stock, although it could be better.
See if management have their own wealth at stake, by checking insider shareholdings in First Northwest Bancorp stock.
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 firstname.lastname@example.org. 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.
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