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Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, The KCP Limited (NSE:KCP) has been paying a dividend to shareholders. Today it yields 1.2%. Should it have a place in your portfolio? Let’s take a look at KCP in more detail.

See our latest analysis for KCP

5 questions I ask before picking a dividend stock

If you are a dividend investor, you should always assess these five key metrics:

• 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?

• Is is able to pay the current rate of dividends from its earnings?

• Will it have the ability to keep paying its dividends going forward?

How does KCP fare?

The current trailing twelve-month payout ratio for the stock is 14%, 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 thinking about whether a dividend is sustainable, another factor to consider is the cash flow. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.

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. Not only have dividend payouts from KCP fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. These characteristics do not bode well for income investors seeking reliable stream of dividends.

Relative to peers, KCP produces a yield of 1.2%, which is high for Basic Materials stocks but still below the market’s top dividend payers.

Next Steps:

After digging a little deeper into KCP’s yield, it’s easy to see why you should be cautious investing in the company just for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering 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. I’ve put together three relevant aspects you should look at:

1. Historical Performance: What has KCP’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on KCP’s board and the CEO’s back ground.

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.