There is a lot to be liked about Air New Zealand Limited (NZSE:AIR) as an income stock. It has paid dividends over the past 10 years. The stock currently pays out a dividend yield of 8.3%, and has a market cap of NZ$3.0b. Does Air New Zealand tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

Check out our latest analysis for Air New Zealand

5 checks you should use to assess a dividend stock

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

• 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 risen in the past couple of years?

• 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 Air New Zealand pass our checks?

The current trailing twelve-month payout ratio for the stock is 63%, which means that the dividend is covered by earnings. Going forward, analysts expect AIR’s payout to remain around the same level at 68% of its earnings, which leads to a dividend yield of 8.6%. In addition to this, EPS is forecasted to fall to NZ$0.28 in the upcoming year.

When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.

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. Whilst its per-share payments have increased during the past 10 years, there has been some hiccups. Shareholders would have seen a few years of reduced payments in this time.

Relative to peers, Air New Zealand has a yield of 8.3%, which is high for Airlines stocks.

Next Steps:

With this in mind, I definitely rank Air New Zealand as a strong dividend stock, and makes it worth further research for anyone who likes steady income generation from their portfolio. 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. I’ve put together three important aspects you should further examine:

1. Future Outlook: What are well-informed industry analysts predicting for AIR’s future growth? Take a look at our free research report of analyst consensus for AIR’s outlook.

2. Valuation: What is AIR 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 AIR is currently mispriced by the market.

3. 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.