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Know This Before Buying Atlantic American Corporation (NASDAQ:AAME) For Its Dividend

Simply Wall St

Dividend paying stocks like Atlantic American Corporation (NASDAQ:AAME) 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. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

With a 1.1% yield and a eight-year payment history, investors probably think Atlantic American looks like a reliable dividend stock. A 1.1% yield is not inspiring, but the longer payment history has some appeal. The company also bought back stock equivalent to around 1.0% of market capitalisation this year. Some simple research can reduce the risk of buying Atlantic American for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Atlantic American!

NasdaqGM:AAME Historical Dividend Yield, November 13th 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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 86% of Atlantic American's profits were paid out as dividends in the last 12 months. 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.

Remember, you can always get a snapshot of Atlantic American'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. Looking at the last decade of data, we can see that Atlantic American paid its first dividend at least eight years ago. It's good to see that Atlantic American has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. Its most recent annual dividend was US$0.02 per share, effectively flat on its first payment eight years ago.

We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments, we don't think this is an attractive combination.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though Atlantic American's EPS have declined at around 46% a year. A sharp decline in earnings per share is not great from from a dividend perspective, as even conservative payout ratios can come under pressure if earnings fall far enough.

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. Atlantic American's payout ratio is within normal bounds. Earnings per share are down, and Atlantic American's dividend has been cut at least once in the past, which is disappointing. To conclude, we've spotted a couple of potential concerns with Atlantic American that may make it less than ideal candidate for dividend investors.

See if management have their own wealth at stake, by checking insider shareholdings in Atlantic American 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.