What Makes Ames National Corporation (NASDAQ:ATLO) A Great Dividend Stock?

Today we’ll take a closer look at Ames National Corporation (NASDAQ:ATLO) 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. 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 Ames National yielding 3.5% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We’d guess that plenty of investors have purchased it for the income. The company also bought back stock during the year, equivalent to approximately 0.8% of the company’s market capitalisation at the time. Some simple research can reduce the risk of buying Ames National for its dividend – read on to learn more.

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NasdaqCM:ATLO Historical Dividend Yield, September 11th 2019
NasdaqCM:ATLO Historical Dividend Yield, September 11th 2019

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, 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. Ames National paid out 50% of its profit as dividends, over the trailing twelve month period. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Plus, there is room to increase the payout ratio over time.

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. For the purpose of this article, we only scrutinise the last decade of Ames National’s dividend payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$1.12 in 2009, compared to US$0.96 last year. The dividend has shrunk at around 1.5% a year during that period.

We struggle to make a case for buying Ames National for its dividend, given that payments have shrunk over the past ten years.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Ames National has grown its earnings per share at 4.7% per annum over the past five years. A payout ratio below 50% leaves ample room to reinvest in the business, and provides finanical flexibility. However, earnings per share are unfortunately not growing much. Might this suggest that the company should pay a higher dividend instead?

Conclusion

To summarise, shareholders should always check that Ames National’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. Firstly, we like that Ames National has a low and conservative payout ratio. Earnings per share growth has been slow, but we respect a company that maintains a relatively stable dividend. Overall we think Ames National is an interesting dividend stock, although it could be better.

Are management backing themselves to deliver performance? Check their shareholdings in Ames National in our latest insider ownership analysis.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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.

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. Thank you for reading.