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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, GWA Group Limited (ASX:GWA) has been paying a dividend to shareholders. Today it yields 6.2%. Let’s dig deeper into whether GWA Group should have a place in your portfolio.

View our latest analysis for GWA Group

5 checks you should use to assess a dividend stock

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

• Does it pay an annual yield higher than 75% of dividend payers?

• Does it consistently pay out dividends without missing a payment of significantly cutting payout?

• Has dividend per share amount increased over the past?

• Can it afford 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 does GWA Group fare?

The company currently pays out 95% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is not sufficiently covered by its earnings. In the near future, analysts are predicting a more sensible payout ratio of 80%, which, assuming the share price stays the same, leads to a dividend yield of around 6.0%. Furthermore, EPS should increase to A$0.24, 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. 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. Dividend payments from GWA Group have been volatile in the past 10 years, with some years experiencing significant drops of over 25%. These characteristics do not bode well for income investors seeking reliable stream of dividends.

Relative to peers, GWA Group produces a yield of 6.2%, which is high for Building stocks.

Next Steps:

Whilst there are few things you may like about GWA Group from a dividend stock perspective, the truth is that overall it probably is not the best choice for a dividend investor. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. 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. Below, I’ve compiled three relevant factors you should further examine: