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Dunelm Group plc (LON:DNLM) has pleased shareholders over the past 10 years, by paying out dividends. The stock currently pays out a dividend yield of 3.5%, and has a market cap of UK£1.5b. Should it have a place in your portfolio? Let’s take a look at Dunelm Group in more detail.

See our latest analysis for Dunelm Group

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 it paying an annual yield above 75% of dividend payers?

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

Does Dunelm Group pass our checks?

Dunelm Group has a trailing twelve-month payout ratio of 65%, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect DNLM’s payout to remain around the same level at 62% of its earnings. Assuming a constant share price, this equates to a dividend yield of 3.9%. Furthermore, EPS should increase to £0.48.

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. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.

If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. DNLM has increased its DPS from £0.055 to £0.27 in the past 10 years. During this period it has not missed a payment, as one would expect for a company increasing its dividend. These are all positive signs of a great, reliable dividend stock.

In terms of its peers, Dunelm Group produces a yield of 3.5%, which is on the low-side for Specialty Retail stocks.

Next Steps:

Keeping in mind the dividend characteristics above, Dunelm Group is definitely worth considering for investors looking to build a dedicated income 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. I’ve put together three key factors you should look at:

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

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

3. Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.