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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. Topdanmark A/S (CPH:TOP) has started paying a dividend to shareholders. It currently trades on a yield of 4.6%. Let’s dig deeper into whether Topdanmark should have a place in your portfolio.
Here’s how I find good dividend stocks
If you are a dividend investor, you should always assess these five key metrics:
- Does it pay an annual yield higher than 75% of dividend payers?
- Does it consistently pay out dividends without missing a payment of significantly cutting payout?
- Has it increased its dividend per share amount over the past?
- Is its earnings sufficient to payout dividend at the current rate?
- Will the company be able to keep paying dividend based on the future earnings growth?
How well does Topdanmark fit our criteria?
Topdanmark has a trailing twelve-month payout ratio of 97%, which means that the dividend is not well-covered by its earnings. In the near future, analysts are predicting a payout ratio of 97%, which, assuming the share price stays the same, leads to a dividend yield of around 5.1%. In addition to this, EPS should increase to DKK16.62.
When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. 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. The reality is that it is too early to consider Topdanmark as a dividend investment. Last year was the company’s first dividend payment, so it is certainly early days. The standard practice for reliable payers is to look for 10 or so years of track record.
Compared to its peers, Topdanmark generates a yield of 4.6%, which is high for Insurance stocks.
Now you know to keep in mind the reason why investors should be careful investing in Topdanmark 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 urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. Below, I’ve compiled three fundamental factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for TOP’s future growth? Take a look at our free research report of analyst consensus for TOP’s outlook.
- Valuation: What is TOP 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 TOP is currently mispriced by the market.
- 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.