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Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Historically, Greencore Group plc (LON:GNC) has paid dividends to shareholders, and these days it yields 2.9%. Should it have a place in your portfolio? Let’s take a look at Greencore Group in more detail.

Check out our latest analysis for Greencore Group

Here’s how I find good dividend stocks

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?

• Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?

• Has dividend per share risen in the past couple of years?

• Can it afford to pay the current rate of dividends from its earnings?

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

How well does Greencore Group fit our criteria?

Greencore Group has a trailing twelve-month payout ratio of more than 200% of earnings, which suggests that the dividend is not well-covered by earnings by any means. However, going forward, analysts expect GNC’s payout to fall into a more sustainable range of 40% of its earnings, which leads to a dividend yield of 3.4%. In addition to this, EPS should increase to £0.10, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Dividend payments from Greencore Group have been volatile in the past 10 years, with some years experiencing significant drops of over 25%. These characteristics do not bode well for income investors seeking reliable stream of dividends.

Compared to its peers, Greencore Group produces a yield of 2.9%, which is high for Food stocks but still below the market’s top dividend payers.

Next Steps:

After digging a little deeper into Greencore Group’s yield, it’s easy to see why you should be cautious investing in the company just for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. 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 fundamental aspects you should further research: