Dividend paying stocks like TD Ameritrade Holding Corporation (NASDAQ:AMTD) 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 popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.
With a nine-year payment history and a 3.1% yield, many investors probably find TD Ameritrade Holding intriguing. We'd agree the yield does look enticing. The company also bought back stock equivalent to around 4.8% of market capitalisation this year. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this 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. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. TD Ameritrade Holding paid out 30% of its profit as dividends, over the trailing twelve month period. This is a middling range that strikes a nice balance between paying dividends to shareholders, and retaining enough earnings to invest in future growth. Plus, there is room to increase the payout ratio over time.
We update our data on TD Ameritrade Holding every 24 hours, so you can always get our latest analysis of its financial health, here.
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. The first recorded dividend for TD Ameritrade Holding, in the last decade, was nine years ago. It's good to see that TD Ameritrade Holding 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. During the past nine-year period, the first annual payment was US$0.20 in 2010, compared to US$1.24 last year. This works out to be a compound annual growth rate (CAGR) of approximately 22% a year over that time. TD Ameritrade Holding's dividend payments have fluctuated, so it hasn't grown 22% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.
So, its dividends have grown at a rapid rate over this time, but payments have been cut in the past. The stock may still be worth considering as part of a diversified dividend portfolio.
Dividend Growth Potential
With a relatively unstable dividend, it's even more important to evaluate if earnings per share (EPS) are growing - it's not worth taking the risk on a dividend getting cut, unless you might be rewarded with larger dividends in future. It's good to see TD Ameritrade Holding has been growing its earnings per share at 23% a year over the past five years. Earnings per share have rocketed in recent times, and we like that the company is retaining more than half of its earnings to reinvest. However, always remember that very few companies can grow at double digit rates forever.
To summarise, shareholders should always check that TD Ameritrade Holding's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're glad to see TD Ameritrade Holding has a low payout ratio, as this suggests earnings are being reinvested in the business. Next, earnings growth has been good, but unfortunately the dividend has been cut at least once in the past. TD Ameritrade Holding has a number of positive attributes, but falls short of our ideal dividend company. It may be worth a look at the right price, though.
Earnings growth generally bodes well for the future value of company dividend payments. See if the 15 TD Ameritrade Holding analysts we track are forecasting continued growth with our free report on analyst estimates for the company.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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. Thank you for reading.