Know This Before Buying Indian Energy Exchange Limited (NSE:IEX) For Its Dividend

Simply Wall St

Fri, Mar 29, 2019, 7:29 PM

A large part of investment returns can be generated by dividend-paying stock given their role in compounding returns over time. Indian Energy Exchange Limited (NSE:IEX) has started paying a dividend to shareholders. It currently trades on a yield of 1.3%. Does Indian Energy Exchange tick all the boxes of a great dividend stock? Below, I'll take you through my analysis.

View our latest analysis for Indian Energy Exchange

5 checks you should use to assess a dividend stock

Whenever I am looking at a potential dividend stock investment, I always check these five metrics:

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 dividend per share amount increased over the past?
Is its earnings sufficient to payout dividend at the current rate?
Based on future earnings growth, will it be able to continue to payout dividend at the current rate?

NSEI:IEX Historical Dividend Yield, March 30th 2019

Does Indian Energy Exchange pass our checks?

Indian Energy Exchange has a trailing twelve-month payout ratio of 42%, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect IEX's payout to increase to 98% of its earnings. Assuming a constant share price, this equates to a dividend yield of 3.6%. Furthermore, EPS should increase to ₹6.23. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward. However this does bring about uncertainty around the sustainability of the payout ratio.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. 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 Indian Energy Exchange as a dividend investment. It has only been paying out dividend for the past one year. Generally, the rule of thumb for determining whether a stock is a reliable dividend payer is that it should be consistently paying dividends for the past 10 years or more. Clearly there's a long road ahead before we can ascertain whether IEX one as a stable dividend player.

In terms of its peers, Indian Energy Exchange generates a yield of 1.3%, which is on the low-side for Capital Markets stocks.