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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. IDFC Bank Limited (NSE:IDFCBANK) has paid a dividend to shareholders in the last few years. It currently yields 2.3%. Let’s dig deeper into whether IDFC Bank should have a place in your portfolio.

View our latest analysis for IDFC Bank

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:

• 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?

• Does earnings amply cover its dividend payments?

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

How well does IDFC Bank fit our criteria?

The company currently pays out 29% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting lower payout ratio of 23%, leading to a dividend yield of 1.9%. Moreover, EPS is also forecasted to fall to ₹0.93 in the upcoming year. The lower EPS on top of a lower payout ratio will lead to a fall in dividend payment moving forward.

When considering the sustainability of dividends, it is also worth checking the cash flow of a company. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. The reality is that it is too early to consider IDFC Bank as a dividend investment. It has only been consistently paying dividends for 2 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Compared to its peers, IDFC Bank has a yield of 2.3%, which is high for Banks stocks.

Next Steps:

Keeping in mind the dividend characteristics above, IDFC Bank is definitely worth considering for investors looking to build a dedicated income portfolio. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. Below, I’ve compiled three relevant aspects you should further research:

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

2. Historical Performance: What has IDFCBANK’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. 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.