Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. Historically, BHP Group (ASX:BHP) has paid a dividend to shareholders. It currently yields 3.8%. Let’s dig deeper into whether BHP Group should have a place in your portfolio.
How I analyze a dividend stock
Whenever I am looking at a potential dividend stock investment, I always check these five metrics:
- Is its annual yield among the top 25% of dividend-paying companies?
- Does it consistently pay out dividends without missing a payment of significantly cutting payout?
- Has it increased its dividend per share amount over the past?
- Does earnings amply cover its dividend payments?
- Will the company be able to keep paying dividend based on the future earnings growth?
How well does BHP Group fit our criteria?
BHP Group has a trailing twelve-month payout ratio of 61%, which means that the dividend is covered by earnings. Going forward, analysts expect BHP’s payout to increase to 73% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 5.7%. In addition to this, EPS should increase to $1.88. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.
When considering the sustainability of dividends, it is also worth checking the cash flow of a company. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
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. Although BHP’s per share payments have increased in the past 10 years, it has not been a completely smooth ride. Shareholders would have seen a few years of reduced payments in this time.
Relative to peers, BHP Group generates a yield of 3.8%, which is high for Metals and Mining stocks but still below the market’s top dividend payers.
Keeping in mind the dividend characteristics above, BHP Group is definitely worth considering for investors looking to build a dedicated income portfolio. 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 pertinent factors you should look at:
- Future Outlook: What are well-informed industry analysts predicting for BHP’s future growth? Take a look at our free research report of analyst consensus for BHP’s outlook.
- Valuation: What is BHP 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 BHP is currently mispriced by the market.
- Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
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 firstname.lastname@example.org. 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.