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, Halma plc (LON:HLMA) has been paying a dividend to shareholders. Today it yields 1.1%. Does Halma tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

See our latest analysis for Halma

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:

• 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 dividend per share amount increased over the past?

• Can it afford 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?

How does Halma fare?

The current trailing twelve-month payout ratio for the stock is 34%, which means that the dividend is covered by earnings. However, going forward, analysts expect HLMA’s payout to fall to 30% of its earnings. Assuming a constant share price, this equates to a dividend yield of 1.3%. However, EPS should increase to £0.45, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. 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. Not only have dividend payouts from Halma fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. This means that dividend hunters should probably steer clear of the stock, at least for now until the track record improves.

Compared to its peers, Halma produces a yield of 1.1%, which is on the low-side for Electronic stocks.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in Halma 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. I’ve put together three key factors you should look at:

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

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

3. 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.