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, Atul Auto Limited (NSE:ATULAUTO) has been paying a dividend to shareholders. Today it yields 1.6%. Should it have a place in your portfolio? Let’s take a look at Atul Auto in more detail.

Check out our latest analysis for Atul Auto

5 checks you should do on a dividend stock

When researching a dividend stock, I always follow the following screening criteria:

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

• 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?

• Is its earnings sufficient to payout dividend at the current rate?

• Will it be able to continue to payout at the current rate in the future?

How does Atul Auto fare?

The company currently pays out 24% 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 ATULAUTO’s payout to increase to 30% of its earnings, which leads to a dividend yield of 2.4%. Furthermore, EPS should increase to ₹24.16. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.

If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Whilst its per-share payments have increased during the past 10 years, there has been some hiccups. Investors have seen reductions in the dividend per share in the past, although, it has picked up again.

Relative to peers, Atul Auto produces a yield of 1.6%, which is high for Auto stocks but still below the market’s top dividend payers.

Next Steps:

With these dividend metrics in mind, I definitely rank Atul Auto as a strong income stock, and is worth further research for anyone who considers dividends an important part of their portfolio strategy. 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. Below, I’ve compiled three relevant factors you should look at:

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

2. Valuation: What is ATULAUTO 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 ATULAUTO 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.