Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. People Infrastructure Ltd (ASX:PPE) has begun paying dividends recently. It now yields 2.1%. Does People Infrastructure tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

View our latest analysis for People Infrastructure

5 questions to ask before buying a dividend stock

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

• Does it pay an annual yield higher than 75% of dividend payers?

• Does it consistently pay out dividends without missing a payment of significantly cutting payout?

• Has it increased its dividend per share amount 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?

Does People Infrastructure pass our checks?

The current trailing twelve-month payout ratio for the stock is 37%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting a higher payout ratio of 53%, leading to a dividend yield of 5.7%. Moreover, EPS should increase to A$0.14. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.

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 People Infrastructure as a dividend investment. It has only been paying out dividend for the past one year. Generally, the rule of thumb for determining whether a stock is a reliable dividend payer is that it should be consistently paying dividends for the past 10 years or more. Clearly there’s a long road ahead before we can ascertain whether PPE one as a stable dividend player.

Relative to peers, People Infrastructure has a yield of 2.1%, which is on the low-side for Professional Services stocks.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in People Infrastructure 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. I’ve put together three relevant aspects you should further research: