Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Historically, Unity Bancorp, Inc. (NASDAQ:UNTY) has paid a dividend to shareholders. It currently yields 1.4%. Does Unity Bancorp 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 assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
- Is its annual yield among the top 25% of dividend-paying companies?
- Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
- Has dividend per share amount increased over the past?
- Can it afford to pay the current rate of dividends from its earnings?
- Will the company be able to keep paying dividend based on the future earnings growth?
How does Unity Bancorp fare?
Unity Bancorp has a trailing twelve-month payout ratio of 13%, which means that the dividend is covered by earnings. Going forward, analysts expect UNTY’s payout to remain around the same level at 14% of its earnings. Assuming a constant share price, this equates to a dividend yield of 1.6%. In addition to this, EPS should increase to $2.15.
If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. The reality is that it is too early to consider Unity Bancorp as a dividend investment. It has only been consistently paying dividends for 6 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
In terms of its peers, Unity Bancorp generates a yield of 1.4%, which is on the low-side for Banks stocks.
After digging a little deeper into Unity Bancorp’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 recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three key aspects you should further examine:
- Valuation: What is UNTY 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 UNTY is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Unity Bancorp’s board and the CEO’s back ground.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
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 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.