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Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, Steel Dynamics, Inc. (NASDAQ:STLD) has paid a dividend to shareholders. It currently yields 2.5%. Does Steel Dynamics tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
5 questions I ask before picking a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
- Does it pay an annual yield higher than 75% of dividend payers?
- Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
- Has the amount of dividend per share grown over the past?
- Is its earnings sufficient to payout dividend at the current rate?
- Will it be able to continue to payout at the current rate in the future?
How does Steel Dynamics fare?
The current trailing twelve-month payout ratio for the stock is 14%, which means that the dividend is covered by earnings. In the near future, analysts are predicting a higher payout ratio of 22% which, assuming the share price stays the same, leads to a dividend yield of 2.0%. However, EPS is forecasted to fall to $4.18 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.
When considering the sustainability of dividends, it is also worth checking the cash flow of a company. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Although STLD’s per share payments have increased in the past 10 years, it has not been a completely smooth ride. Investors have seen reductions in the dividend per share in the past, although, it has picked up again.
Compared to its peers, Steel Dynamics generates a yield of 2.5%, which is high for Metals and Mining stocks but still below the market’s top dividend payers.
Keeping in mind the dividend characteristics above, Steel Dynamics is definitely worth considering for investors looking to build a dedicated income portfolio. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. I’ve put together three relevant aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for STLD’s future growth? Take a look at our free research report of analyst consensus for STLD’s outlook.
- Valuation: What is STLD 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 STLD is currently mispriced by the market.
- Other 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 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.