Should You Buy Atlantic American Corporation (NASDAQ:AAME) For Its 1.0% Dividend?

Today we’ll take a closer look at Atlantic American Corporation (NASDAQ:AAME) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. On the other hand, investors have been known to buy a stock because of its yield, and then lose money if the company’s dividend doesn’t live up to expectations.

With a 1.0% yield and a eight-year payment history, investors probably think Atlantic American looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. The company also bought back stock equivalent to around 0.6% of market capitalisation this year. Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

NasdaqGM:AAME Historical Dividend Yield, January 14th 2020
NasdaqGM:AAME Historical Dividend Yield, January 14th 2020

Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Although it reported a loss over the past 12 months, Atlantic American currently pays a dividend. When a financial business is loss-making and pays a dividend, the dividend is not covered by profits. Its important that investors assess the quality of the company’s assets and whether it can return to generating a positive income.

Remember, you can always get a snapshot of Atlantic American’s latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Looking at the last decade of data, we can see that Atlantic American paid its first dividend at least eight years ago. Although it has been paying a dividend for several years now, the dividend has been cut at least once, and we’re cautious about the consistency of its dividend across a full economic cycle. Its most recent annual dividend was US$0.02 per share, effectively flat on its first payment eight years ago.

It’s good to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth, anyway. We’re not that enthused by this.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. Over the past five years, it looks as though Atlantic American’s EPS have declined at around 27% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and Atlantic American’s earnings per share, which support the dividend, have been anything but stable.

Conclusion

Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Atlantic American is paying out a dividend despite reporting a loss; clearly a concern. Earnings per share are down, and Atlantic American’s dividend has been cut at least once in the past, which is disappointing. Using these criteria, Atlantic American looks suboptimal from a dividend investment perspective.

You can also discover whether shareholders are aligned with insider interests by checking our visualisation of insider shareholdings and trades in Atlantic American stock.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding 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.

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