Yahoo Finance

A large part of investment returns can be generated by dividend-paying stock given their role in compounding returns over time. Historically, Xylem Inc (NYSE:XYL) has paid dividends to shareholders, and these days it yields 1.1%. Should it have a place in your portfolio? Let’s take a look at Xylem in more detail.

View our latest analysis for Xylem

5 checks you should do on a dividend stock

When researching a dividend stock, I always follow the following screening criteria:

• Is their annual yield among the top 25% 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 its earnings sufficient to payout dividend at the current rate?

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

Does Xylem pass our checks?

The current trailing twelve-month payout ratio for the stock is 38%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting lower payout ratio of 27%, leading to a dividend yield of around 1.2%. However, EPS should increase to $2.95, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. 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 Xylem as a dividend investment. It has only been consistently paying dividends for 7 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

In terms of its peers, Xylem produces a yield of 1.1%, which is on the low-side for Machinery stocks.

Next Steps:

After digging a little deeper into Xylem’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 recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. I’ve put together three important factors you should further research:

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

2. Valuation: What is XYL 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 XYL is currently mispriced by the market.

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.