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A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Historically, Coats Group plc (LON:COA) has paid dividends to shareholders, and these days it yields 2.0%. Does Coats Group tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

See our latest analysis for Coats Group

5 checks you should do on a dividend stock

When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:

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

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

• Has the amount of dividend per share grown over the past?

• Can it afford to pay the current rate of dividends from its earnings?

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

Does Coats Group pass our checks?

The current trailing twelve-month payout ratio for the stock is 28%, which means that the dividend is covered by earnings. In the near future, analysts are predicting lower payout ratio of 23%, leading to a dividend yield of 1.9%. However, EPS should increase to $0.062, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider 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.

If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. Although COA’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.

In terms of its peers, Coats Group generates a yield of 2.0%, which is on the low-side for Luxury stocks.

Next Steps:

Taking into account the dividend metrics, Coats Group ticks most of the boxes as a strong dividend investment, putting it in my list of top dividend payers. 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 pertinent factors you should look at:

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

2. Valuation: What is COA 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 COA 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.