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Shareholders Are Loving Armstrong World Industries, Inc.'s (NYSE:AWI) 0.9% Yield

Simply Wall St

Dividend paying stocks like Armstrong World Industries, Inc. (NYSE:AWI) 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.

Some readers mightn't know much about Armstrong World Industries's 0.9% dividend, as it has only been paying distributions for a year or so. The company also returned around 2.9% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple research can reduce the risk of buying Armstrong World Industries for its dividend - read on to learn more.

Click the interactive chart for our full dividend analysis

NYSE:AWI Historical Dividend Yield, November 24th 2019

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. Armstrong World Industries paid out 15% of its profit as dividends, over the trailing twelve month period. We'd say its dividends are thoroughly covered by earnings.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Armstrong World Industries paid out a conservative 38% of its free cash flow as dividends last year. It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

We update our data on Armstrong World Industries every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. 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. Dividends per share have grown at approximately 14% per year over this 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

The other half of the dividend investing equation is evaluating whether earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it's great to see Armstrong World Industries has grown its earnings per share at 16% per annum over the past five years. Earnings per share are growing at a solid clip, and the payout ratio is low. We think this is an ideal combination in a dividend stock.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Firstly, we like that Armstrong World Industries has low and conservative payout ratios. We were also glad to see it growing earnings, although its dividend history is not as long as we'd like. Armstrong World Industries performs highly under this analysis, although it falls slightly short of our exacting standards. At the right valuation, it could be a solid dividend prospect.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 8 Armstrong World Industries analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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.

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. Thank you for reading.