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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. In the past 10 years SRG Limited (ASX:SRG) has returned an average of 5.00% per year to investors in the form of dividend payouts. Does SRG tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis. View our latest analysis for SRG

5 questions I ask before picking a dividend stock

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

• Is its annual yield among the top 25% of dividend-paying companies?

• Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?

• Has it increased its dividend per share amount over the past?

• Does earnings amply cover its dividend payments?

• Based on future earnings growth, will it be able to continue to payout dividend at the current rate?

How well does SRG fit our criteria?

The company currently pays out 69.51% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. However, going forward, analysts expect SRG’s payout to fall to 52.62% of its earnings, which leads to a dividend yield of around 3.83%. However, EPS should increase to A$0.14, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment. 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 SRG 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. Compared to its peers, SRG generates a yield of 3.50%, which is high for Construction stocks but still below the market’s top dividend payers.

Next Steps:

If SRG is in your portfolio for cash-generating reasons, there may be better alternatives out there. 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, 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 fundamental factors you should further examine: