Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, Persistent Systems Limited (NSE:PERSISTENT) has been paying a dividend to shareholders. Today it yields 1.7%. Should it have a place in your portfolio? Let’s take a look at Persistent Systems in more detail.

View our latest analysis for Persistent Systems

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:

• Does it pay an annual yield higher than 75% of dividend payers?

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

• Has it increased its dividend per share amount over the past?

• Does earnings amply cover its dividend payments?

• Will it have the ability to keep paying its dividends going forward?

Does Persistent Systems pass our checks?

The company currently pays out 7.0% 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 PERSISTENT’s payout to increase to 25% of its earnings, which leads to a dividend yield of 2.4%. Furthermore, EPS should increase to ₹49.82. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.

When considering the sustainability of dividends, it is also worth checking the cash flow of a company. 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. Unfortunately, it is really too early to view Persistent Systems as a dividend investment. It has only been consistently paying dividends for 9 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Compared to its peers, Persistent Systems produces a yield of 1.7%, which is high for IT stocks but still below the market’s top dividend payers.

Next Steps:

If you are building an income portfolio, then Persistent Systems is a complicated choice since it has some positive aspects as well as negative ones. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. 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 fundamental factors you should further examine: