A large part of investment returns can be generated by dividend-paying stock given their role in compounding returns over time. Historically, Keppel Corporation Limited (SGX:BN4) has paid dividends to shareholders, and these days it yields 4.1%. Does Keppel tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

See our latest analysis for Keppel

5 checks you should use to assess a dividend stock

When researching a dividend stock, I always follow the following screening criteria:

• Is its annual yield among the top 25% of dividend-paying companies?

• Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?

• Has the amount of dividend per share grown over the past?

• Is its earnings sufficient to payout dividend at the current rate?

• Based on future earnings growth, will it be able to continue to payout dividend at the current rate?

How does Keppel fare?

The current trailing twelve-month payout ratio for BN4 is 129%, meaning the dividend is not sufficiently covered by its earnings. However, going forward, analysts expect BN4’s payout to fall into a more sustainable range of 44% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 4.6%. Moreover, EPS should increase to SGD0.55, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When considering the sustainability of dividends, it is also worth checking the cash flow of a company. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.

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 Keppel 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.

Relative to peers, Keppel generates a yield of 4.1%, which is high for Industrials stocks but still below the market’s top dividend payers.

Next Steps:

After digging a little deeper into Keppel’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 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 pertinent aspects you should further research:

1. Future Outlook: What are well-informed industry analysts predicting for BN4’s future growth? Take a look at our free research report of analyst consensus for BN4’s outlook.

2. Valuation: What is BN4 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 BN4 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.