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Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. In the last few years NNIT A/S (CPH:NNIT) has paid a dividend to shareholders. Today it yields 2.5%. Let’s dig deeper into whether NNIT should have a place in your portfolio.

See our latest analysis for NNIT

How I analyze a dividend stock

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

• Is their annual yield among the top 25% of dividend payers?

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

• Has dividend per share amount increased over the past?

• Is is able 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 NNIT fit our criteria?

NNIT has a trailing twelve-month payout ratio of 49%, which means that the dividend is covered by earnings. Going forward, analysts expect NNIT’s payout to increase to 71% of its earnings, which leads to a dividend yield of around 4.1%. In addition to this, EPS should increase to DKK9.98. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.

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. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.

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. Unfortunately, it is really too early to view NNIT as a dividend investment. It has only been consistently paying dividends for 4 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

In terms of its peers, NNIT has a yield of 2.5%, which is high for Healthcare Services stocks but still below the market’s top dividend payers.

Next Steps:

Taking all the above into account, NNIT is a complicated pick for dividend investors given that there are a couple of positive things about it as well as negative. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. 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. There are three pertinent factors you should further research: