Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. South32 Limited (ASX:S32) has recently paid dividends to shareholders, and currently yields 4.2%. Should it have a place in your portfolio? Let’s take a look at South32 in more detail.

Check out our latest analysis for South32

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 it increased its dividend per share amount over the past?

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

• Will the company be able to keep paying dividend based on the future earnings growth?

How does South32 fare?

The company currently pays out 41% of its earnings as a dividend, according to its trailing twelve-month data, which means that the dividend is covered by earnings. In the near future, analysts are predicting a higher payout ratio of 52%, leading to a dividend yield of 5.3%. Moreover, EPS should increase to $0.31. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.

When assessing the forecast sustainability of a dividend it is also worth considering 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. The reality is that it is too early to consider South32 as a dividend investment. It has only been consistently paying dividends for 3 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

In terms of its peers, South32 produces a yield of 4.2%, which is on the low-side for Metals and Mining stocks.

Next Steps:

Whilst there are few things you may like about South32 from a dividend stock perspective, the truth is that overall it probably is not the best choice for a dividend investor. 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 essential factors you should look at: