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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, Vesuvius plc (LON:VSVS) has paid dividends to shareholders, and these days it yields 2.8%. Does Vesuvius tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

Check out our latest analysis for Vesuvius

Here’s how I find good dividend stocks

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

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

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

• Has dividend per share risen in the past couple of years?

• Can it afford 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?

How does Vesuvius fare?

The current trailing twelve-month payout ratio for the stock is 82.0%, which means that the dividend is covered by earnings. However, going forward, analysts expect VSVS’s payout to fall to 38.7% of its earnings, which leads to a dividend yield of around 3.2%. However, EPS should increase to £0.41, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider 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. The reality is that it is too early to consider Vesuvius as a dividend investment. It has only been consistently paying dividends for 6 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

In terms of its peers, Vesuvius produces a yield of 2.8%, which is on the low-side for Machinery stocks.

Next Steps:

If Vesuvius is in your portfolio for cash-generating reasons, there may be better alternatives out there. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. 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 essential aspects you should further research:

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

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

3. 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.