Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. Historically, Fortescue Metals Group Limited (ASX:FMG) has been paying a dividend to shareholders. Today it yields 6.3%. Should it have a place in your portfolio? Let’s take a look at Fortescue Metals Group in more detail.
How I analyze a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
- Does it pay an annual yield higher than 75% of dividend payers?
- Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
- 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?
Does Fortescue Metals Group pass our checks?
The current trailing twelve-month payout ratio for the stock is 60%, which means that the dividend is covered by earnings. In the near future, analysts are predicting a payout ratio of 66%, leading to a dividend yield of around 7.6%. In addition to this, EPS should increase to $0.31.
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.
Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. The reality is that it is too early to consider Fortescue Metals Group as a dividend investment. It has only been consistently paying dividends for 8 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.
Relative to peers, Fortescue Metals Group produces a yield of 6.3%, which is high for Metals and Mining stocks.
Keeping in mind the dividend characteristics above, Fortescue Metals 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 key aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for FMG’s future growth? Take a look at our free research report of analyst consensus for FMG’s outlook.
- Valuation: What is FMG 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 FMG 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.
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 firstname.lastname@example.org.