Know This Before Buying ARC Resources Ltd (TSE:ARX) For Its Dividend

Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, ARC Resources Ltd (TSE:ARX) has paid dividends to shareholders, and these days it yields 4.9%. Should it have a place in your portfolio? Let's take a look at ARC Resources in more detail.

Check out our latest analysis for ARC Resources

5 checks you should use to assess a dividend stock

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

• Does it pay an annual yield higher than 75% of dividend payers?
• Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
• Has dividend per share risen in the past couple of years?
• Is is able to pay the current rate of dividends from its earnings?
• Will it have the ability to keep paying its dividends going forward?

How well does ARC Resources fit our criteria?

The company currently pays out 161% of its earnings as a dividend, according to its trailing twelve-month data, which means that the dividend is not well-covered by its earnings. In the near future, analysts are predicting a lower payout ratio of 114%, leading to a dividend yield of around 4.9%. However, EPS should increase to CA$0.51, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

If there is one thing that you want to be reliable in your life, it's dividend stocks and their constant income stream. Not only have dividend payouts from ARC Resources fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. This means that dividend hunters should probably steer clear of the stock, at least for now until the track record improves.

Compared to its peers, ARC Resources produces a yield of 4.9%, which is high for Oil and Gas stocks but still below the market's top dividend payers.

Next Steps:

After digging a little deeper into ARC Resources's yield, it's easy to see why you should be cautious investing in the company just for the dividend. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. There are three important aspects you should further research:

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