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A large part of investment returns can be generated by dividend-paying stock given their role in compounding returns over time. Historically, Avensia AB (publ) (STO:AVEN) has been paying a dividend to shareholders. Today it yields 1.5%. Does Avensia tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

See our latest analysis for Avensia

5 questions to ask before buying 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?

• Does it consistently pay out dividends without missing a payment of significantly cutting payout?

• Has dividend per share risen in the past couple of years?

• Does earnings amply cover its dividend payments?

• Will the company be able to keep paying dividend based on the future earnings growth?

Does Avensia pass our checks?

The company currently pays out 66% of its earnings as a dividend, according to its trailing twelve-month data, which means that the dividend is covered by earnings. However, going forward, analysts expect AVEN’s payout to fall to 37% of its earnings, which leads to a dividend yield of 3.0%. However, EPS should increase to SEK0.67, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

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.

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. Unfortunately, it is really too early to view Avensia as a dividend investment. It has only been consistently paying dividends for 7 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Relative to peers, Avensia has a yield of 1.5%, which is on the low-side for Software stocks.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in Avensia 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, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company’s fundamentals and underlying business before making an investment decision. I’ve put together three pertinent factors you should look at: