A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Historically, Tata Steel Limited (NSE:TATASTEEL) has paid a dividend to shareholders. It currently yields 1.8%. Let’s dig deeper into whether Tata Steel should have a place in your portfolio.

View our latest analysis for Tata Steel

5 checks you should use to assess a dividend stock

If you are a dividend investor, you should always assess these five key metrics:

• Is it paying an annual yield above 75% of dividend payers?

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

• Has dividend per share amount increased over the past?

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

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

How well does Tata Steel fit our criteria?

Tata Steel has a trailing twelve-month payout ratio of 7.4%, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect TATASTEEL’s payout to increase to 12% of its earnings, which leads to a dividend yield of 1.8%. However, EPS is forecasted to fall to ₹76.8 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.

When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. Not only have dividend payouts from Tata Steel fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. This means that dividend hunters should probably steer clear of the stock, at least for now until the track record improves.

Compared to its peers, Tata Steel has a yield of 1.8%, which is on the low-side for Metals and Mining stocks.

Next Steps:

With these dividend metrics in mind, I definitely rank Tata Steel as a strong income stock, and is worth further research for anyone who considers dividends an important part of their portfolio strategy. 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 key aspects you should look at: