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Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Historically, Washington H Soul Pattinson and Company Limited (ASX:SOL) has been paying a dividend to shareholders. Today it yields 2.1%. Let’s dig deeper into whether Washington H. Soul Pattinson should have a place in your portfolio.

See our latest analysis for Washington H. Soul Pattinson

5 checks you should do on a dividend stock

When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:

• Is it the top 25% annual dividend yield payer?

• 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?

• Will it be able to continue to payout at the current rate in the future?

Does Washington H. Soul Pattinson pass our checks?

Washington H. Soul Pattinson has a trailing twelve-month payout ratio of 50%, which means that the dividend is covered by earnings. In the near future, analysts are predicting lower payout ratio of 45%, leading to a dividend yield of around 2.2%. However, EPS should increase to A$2, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

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.

Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. SOL has increased its DPS from A$0.30 to A$0.56 in the past 10 years. It has also been paying out dividend consistently during this time, as you’d expect for a company increasing its dividend levels. This is an impressive feat, which makes SOL a true dividend rockstar.

In terms of its peers, Washington H. Soul Pattinson produces a yield of 2.1%, which is on the low-side for Oil and Gas stocks.

Next Steps:

With these dividend metrics in mind, I definitely rank Washington H. Soul Pattinson 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, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. Below, I’ve compiled three pertinent factors you should further examine: