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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, Funkwerk AG (FRA:FEW) has paid dividends to shareholders, and these days it yields 1.9%. Let’s dig deeper into whether Funkwerk should have a place in your portfolio.

Check out our latest analysis for Funkwerk

Here’s how I find good dividend stocks

When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:

• Is it the top 25% annual dividend yield payer?

• Does it consistently pay out dividends without missing a payment of significantly cutting payout?

• 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 Funkwerk fare?

The company currently pays out 46% of its earnings as a dividend, according to its trailing twelve-month data, which means that the dividend is 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.

When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.

If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. Dividend payments from Funkwerk have been volatile in the past 10 years, with some years experiencing significant drops of over 25%. This means that dividend hunters should probably steer clear of the stock, at least for now until the track record improves.

In terms of its peers, Funkwerk produces a yield of 1.9%, which is on the low-side for Communications stocks.

Next Steps:

After digging a little deeper into Funkwerk’s yield, it’s easy to see why you should be cautious investing in the company just 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. I’ve put together three fundamental aspects you should further research:

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

2. Historical Performance: What has FEW’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

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.