Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, Victrex plc (LON:VCT) has paid a dividend to shareholders. It currently yields 1.8%. Should it have a place in your portfolio? Let’s take a look at Victrex in more detail.

Check out our latest analysis for Victrex

How I analyze a dividend stock

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?

• Has it paid dividend every year without dramatically reducing payout in the past?

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

• Is is able to pay the current rate of dividends from its earnings?

• Will it be able to continue to payout at the current rate in the future?

How does Victrex fare?

Victrex has a trailing twelve-month payout ratio of 41%, which means that the dividend is covered by earnings. Going forward, analysts expect VCT’s payout to increase to 75% of its earnings, which leads to a dividend yield of around 3.4%. However, EPS is forecasted to fall to £1.32 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.

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. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.

If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. VCT has increased its DPS from £0.18 to £0.54 in the past 10 years. It has also been paying out dividend consistently during this time, as you’d expect for a company increasing its dividend levels. This is an impressive feat, which makes VCT a true dividend rockstar.

Compared to its peers, Victrex generates a yield of 1.8%, which is on the low-side for Chemicals stocks.

Next Steps:

Keeping in mind the dividend characteristics above, Victrex is definitely worth considering for investors looking to build a dedicated income portfolio. 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 essential aspects you should look at:

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

2. Valuation: What is VCT 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 VCT 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.

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.