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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, Tractor Supply Company (NASDAQ:TSCO) has been paying a dividend to shareholders. Today it yields 1.5%. Should it have a place in your portfolio? Let’s take a look at Tractor Supply in more detail.

See our latest analysis for Tractor Supply

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 paying an annual yield above 75% 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?

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

How well does Tractor Supply fit our criteria?

The company currently pays out 28% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect TSCO’s payout to remain around the same level at 28% of its earnings. Assuming a constant share price, this equates to a dividend yield of 1.6%. Furthermore, EPS should increase to $4.59.

When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

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 Tractor Supply as a dividend investment. It has only been consistently paying dividends for 9 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Relative to peers, Tractor Supply has a yield of 1.5%, which is on the low-side for Specialty Retail stocks.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in Tractor Supply for the dividend. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. 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 important aspects you should further research: