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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, AB Fagerhult (STO:FAG) has paid a dividend to shareholders. It currently yields 2.5%. Does AB Fagerhult tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

See our latest analysis for AB Fagerhult

5 questions I ask before picking a dividend stock

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

• Is their annual yield among the top 25% of dividend payers?

• Has it paid dividend every year without dramatically reducing payout in the past?

• Has dividend per share amount increased 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 does AB Fagerhult fare?

The company currently pays out 47% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect FAG’s payout to remain around the same level at 47% of its earnings, which leads to a dividend yield of around 2.8%. Furthermore, EPS should increase to SEK4.61.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. 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. Although FAG’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.

Relative to peers, AB Fagerhult generates a yield of 2.5%, which is on the low-side for Electrical stocks.

Next Steps:

Keeping in mind the dividend characteristics above, AB Fagerhult is definitely worth considering for investors looking to build a dedicated income portfolio. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three fundamental aspects you should look at:

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

2. Valuation: What is FAG 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 FAG 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.