Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, Ambuja Cements Limited (NSE:AMBUJACEM) has paid dividends to shareholders, and these days it yields 1.7%. Should it have a place in your portfolio? Let’s take a look at Ambuja Cements in more detail.

Check out our latest analysis for Ambuja Cements

5 checks you should use to assess a dividend stock

Whenever I am looking at a potential dividend stock investment, I always check these five metrics:

• Is it the top 25% annual dividend yield payer?

• Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?

• Has dividend per share amount increased over the past?

• Is is able to pay the current rate of dividends from its earnings?

• Based on future earnings growth, will it be able to continue to payout dividend at the current rate?

Does Ambuja Cements pass our checks?

The current trailing twelve-month payout ratio for the stock is 25%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting a higher payout ratio of 49%, leading to a dividend yield of 1.9%. However, EPS is forecasted to fall to ₹7.48 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. Although AMBUJACEM’s per share payments have increased in the past 10 years, it has not been a completely smooth ride. Shareholders would have seen a few years of reduced payments in this time.

Compared to its peers, Ambuja Cements has a yield of 1.7%, which is high for Basic Materials stocks but still below the market’s top dividend payers.

Next Steps:

Keeping in mind the dividend characteristics above, Ambuja Cements 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. There are three relevant factors you should further research:

1. Future Outlook: What are well-informed industry analysts predicting for AMBUJACEM’s future growth? Take a look at our free research report of analyst consensus for AMBUJACEM’s outlook.

2. Valuation: What is AMBUJACEM 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 AMBUJACEM is currently mispriced by the market.

3. Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.