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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. Etex SA (EBR:094124453) has recently paid dividends to shareholders, and currently yields 4.0%. Let’s dig deeper into whether Etex should have a place in your portfolio.

View our latest analysis for Etex

5 questions to ask before buying 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?

• Does earnings amply cover its dividend payments?

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

Does Etex pass our checks?

Etex has a trailing twelve-month payout ratio of 28%, meaning the dividend is sufficiently covered by earnings. Furthermore, analysts have not forecasted a dividends per share for the future, which makes it hard to determine the yield shareholders should expect, and whether the current payout is sustainable, moving forward.

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.

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. The reality is that it is too early to consider Etex as a dividend investment. It has only been consistently paying dividends for 4 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Relative to peers, Etex has a yield of 4.0%, which is high for Building stocks but still below the market’s top dividend payers.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in Etex for the dividend. 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. There are three fundamental factors you should further examine:

1. Future Outlook: What are well-informed industry analysts predicting for 094124453’s future growth? Take a look at our free research report of analyst consensus for 094124453’s outlook.

2. Valuation: What is 094124453 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 094124453 is currently mispriced by the market.

3. 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.