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Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. Historically, Sonata Software Limited (NSE:SONATSOFTW) has been paying a dividend to shareholders. Today it yields 3.2%. Let’s dig deeper into whether Sonata Software should have a place in your portfolio.

See our latest analysis for Sonata Software

5 checks you should do on a dividend stock

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

• Is their annual yield among the top 25% of dividend payers?

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

• Has it increased its dividend per share amount 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 does Sonata Software fare?

The company currently pays out 53% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. Furthermore, analysts have not forecasted a dividends per share for the future, which makes it hard to determine the yield shareholders should expect, and whether the current payout is sustainable, moving forward.

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.

If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. Whilst its per-share payments have increased during the past 10 years, there has been some hiccups. Investors have seen reductions in the dividend per share in the past, although, it has picked up again.

Compared to its peers, Sonata Software generates a yield of 3.2%, which is high for IT stocks.

Next Steps:

With this in mind, I definitely rank Sonata Software 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, 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 research:

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

2. Valuation: What is SONATSOFTW 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 SONATSOFTW 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.