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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, Koninklijke Philips NV (AMS:PHIA) has paid dividends to shareholders, and these days it yields 2.3%. Should it have a place in your portfolio? Let’s take a look at Koninklijke Philips in more detail.

See our latest analysis for Koninklijke Philips

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:

• 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 it increased its dividend per share amount 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?

How well does Koninklijke Philips fit our criteria?

The company currently pays out 85% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. However, going forward, analysts expect PHIA’s payout to fall to 42% of its earnings, which leads to a dividend yield of 2.5%. However, EPS should increase to €1.51, 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. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.

If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. PHIA has increased its DPS from €0.70 to €0.80 in the past 10 years. It has also been paying out dividend consistently during this time, as you’d expect for a company increasing its dividend levels. This is an impressive feat, which makes PHIA a true dividend rockstar.

Compared to its peers, Koninklijke Philips produces a yield of 2.3%, which is high for Medical Equipment stocks but still below the low risk savings rate.

Next Steps:

With this in mind, I definitely rank Koninklijke Philips as a strong dividend stock, and makes it worth further research for anyone who likes steady income generation from their portfolio. 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. There are three pertinent aspects you should look at: