A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Think Childcare Limited (ASX:TNK) has paid a dividend to shareholders in the last few years. It currently yields 7.1%. Let’s dig deeper into whether Think Childcare should have a place in your portfolio.
View our latest analysis for Think Childcare
5 questions to ask before buying a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
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Is their annual yield among the top 25% of dividend payers?
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Does it consistently pay out dividends without missing a payment of significantly cutting payout?
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Has it increased its dividend per share amount over the past?
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Can it afford to pay the current rate of dividends from its earnings?
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Will the company be able to keep paying dividend based on the future earnings growth?
How does Think Childcare fare?
The company currently pays out 67.0% 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 lower payout ratio of 55.9%, leading to a dividend yield of around 6.1%. However, EPS should increase to A$0.14, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When considering the sustainability of dividends, it is also worth checking the cash flow of a company. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. Unfortunately, it is really too early to view Think Childcare 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.
Relative to peers, Think Childcare has a yield of 7.1%, which is high for Consumer Services stocks.
Next Steps:
Taking into account the dividend metrics, Think Childcare ticks most of the boxes as a strong dividend investment, putting it in my list of top dividend payers. 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. There are three pertinent aspects you should further examine:
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Future Outlook: What are well-informed industry analysts predicting for TNK’s future growth? Take a look at our free research report of analyst consensus for TNK’s outlook.
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Valuation: What is TNK 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 TNK is currently mispriced by the market.
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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.