Is Bank of the James Financial Group, Inc. (NASDAQ:BOTJ) A Great Dividend Stock?

Is Bank of the James Financial Group, Inc. (NASDAQ:BOTJ) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

With a 1.9% yield and a six-year payment history, investors probably think Bank of the James Financial Group looks like a reliable dividend stock. A 1.9% yield is not inspiring, but the longer payment history has some appeal. Some simple research can reduce the risk of buying Bank of the James Financial Group for its dividend - read on to learn more.

Explore this interactive chart for our latest analysis on Bank of the James Financial Group!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Bank of the James Financial Group paid out 20% of its profit as dividends. We'd say its dividends are thoroughly covered by earnings.

We update our data on Bank of the James Financial Group every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the data, we can see that Bank of the James Financial Group has been paying a dividend for the past six years. The dividend has been quite stable over the past six years, which is great to see - although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past six-year period, the first annual payment was US$0.20 in 2014, compared to US$0.28 last year. Dividends per share have grown at approximately 5.8% per year over this time.

Bank of the James Financial Group has been growing its dividend at a decent rate, and the payments have been stable despite the short payment history. This is a positive start.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term. Bank of the James Financial Group has grown its earnings per share at 4.8% per annum over the past five years. As we saw above, earnings per share growth has not been strong. However, the payout ratio is low, and some companies can deliver adequate dividend performance simply by increasing the payout ratio.

Conclusion

To summarise, shareholders should always check that Bank of the James Financial Group's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're glad to see Bank of the James Financial Group has a low payout ratio, as this suggests earnings are being reinvested in the business. Unfortunately, earnings growth has also been mediocre, and we think it has not been paying dividends long enough to demonstrate resilience across economic cycles. While we're not hugely bearish on it, overall we think there are potentially better dividend stocks than Bank of the James Financial Group out there.

Now, if you want to look closer, it would be worth checking out our free research on Bank of the James Financial Group management tenure, salary, and performance.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.