The Attractive Combination That Could Earn Banco do Nordeste do Brasil S.A. (BVMF:BNBR3) A Place In Your Dividend Portfolio

Dividend paying stocks like Banco do Nordeste do Brasil S.A. (BVMF:BNBR3) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

A high yield and a long history of paying dividends is an appealing combination for Banco do Nordeste do Brasil. It would not be a surprise to discover that many investors buy it for the dividends. There are a few simple ways to reduce the risks of buying Banco do Nordeste do Brasil for its dividend, and we'll go through these below.

Explore this interactive chart for our latest analysis on Banco do Nordeste do Brasil!

Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, 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. In the last year, Banco do Nordeste do Brasil paid out 20% of its profit as dividends. With a low payout ratio, it looks like the dividend is comprehensively covered by earnings.

We update our data on Banco do Nordeste do Brasil every 24 hours, so you can always get our latest analysis of its financial health, here.

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. Banco do Nordeste do Brasil has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. This dividend has been unstable, which we define as having been cut one or more times over this time. During the past 10-year period, the first annual payment was R$2.6 in 2011, compared to R$4.8 last year. This works out to be a compound annual growth rate (CAGR) of approximately 6.2% a year over that time. The dividends haven't grown at precisely 6.2% every year, but this is a useful way to average out the historical rate of growth.

It's good to see the dividend growing at a decent rate, but the dividend has been cut at least once in the past. Banco do Nordeste do Brasil might have put its house in order since then, but we remain cautious.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? It's good to see Banco do Nordeste do Brasil has been growing its earnings per share at 20% a year over the past five years. Earnings per share are growing at a solid clip, and the payout ratio is low. We think this is an ideal combination in a dividend stock.

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. We're glad to see Banco do Nordeste do Brasil has a low payout ratio, as this suggests earnings are being reinvested in the business. We were also glad to see it growing earnings, but it was concerning to see the dividend has been cut at least once in the past. Banco do Nordeste do Brasil has a credible record on several fronts, but falls slightly short of our standards for a dividend stock.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've identified 2 warning signs for Banco do Nordeste do Brasil (1 is concerning!) that you should be aware of before investing.

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

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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. 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. Simply Wall St has no position in any stocks mentioned.
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