Does Australian Finance Group Limited (ASX:AFG) Have A Place In Your Portfolio?

Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. In the last few years Australian Finance Group Limited (ASX:AFG) has paid a dividend to shareholders. Today it yields 7.4%. Should it have a place in your portfolio? Let's take a look at Australian Finance Group in more detail.

View our latest analysis for Australian Finance Group

5 questions to ask before buying a dividend stock

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

• Is it paying an annual yield above 75% of dividend payers?
• Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
• Has dividend per share amount increased over the past?
• Can it afford to pay the current rate of dividends from its earnings?
• Will the company be able to keep paying dividend based on the future earnings growth?

How well does Australian Finance Group fit our criteria?

The company currently pays out 67% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect AFG's payout to increase to 79% of its earnings, which leads to a dividend yield of around 9.2%. However, EPS is forecasted to fall to A$0.15 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.

When considering the sustainability of dividends, it is also worth checking the cash flow of a company. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.

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. The reality is that it is too early to consider Australian Finance Group as a dividend investment. It has only been consistently paying dividends for 3 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Compared to its peers, Australian Finance Group has a yield of 7.4%, which is high for Mortgage stocks.

Next Steps:

Keeping in mind the dividend characteristics above, Australian Finance Group is definitely worth considering for investors looking to build a dedicated income portfolio. 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. There are three key aspects you should further research:

1. Future Outlook: What are well-informed industry analysts predicting for AFG’s future growth? Take a look at our free research report of analyst consensus for AFG’s outlook.
2. Valuation: What is AFG 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 AFG is currently mispriced by the market.
3. Other 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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.