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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. In the past 3 years Australian Finance Group Limited (ASX:AFG) has returned an average of 7.00% per year to investors in the form of dividend payouts. Should it have a place in your portfolio? Let’s take a look at Australian Finance Group in more detail. View our latest analysis for Australian Finance Group

5 questions to ask before buying a dividend stock

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

• Is it paying an annual yield above 75% of dividend payers?

• Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?

• Has the amount of dividend per share grown over the past?

• Is it 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 Australian Finance Group pass our checks?

Australian Finance Group has a trailing twelve-month payout ratio of 53.36%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting a higher payout ratio of 77.07%, leading to a dividend yield of 7.40%. However, EPS is forecasted to fall to A$0.15 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income. 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. The reality is that it is too early to consider Australian Finance Group as a dividend investment. It has only been consistently paying dividends for 3 years, however, standard practice for reliable payers is to look for a 10-year minimum track record. Relative to peers, Australian Finance Group produces a yield of 5.84%, which is high for Mortgage stocks.

Next Steps:

With this in mind, I definitely rank Australian Finance Group 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. Below, I’ve compiled three relevant factors you should further examine:

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

• 2. Valuation: What is AFG 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 AFG 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 pass 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.