A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Historically, Canadian Pacific Railway Limited (TSE:CP) has been paying a dividend to shareholders. Today it yields 1.1%. Should it have a place in your portfolio? Let’s take a look at Canadian Pacific Railway in more detail.
5 questions I ask before picking 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 it paid dividend every year without dramatically reducing payout in the past?
- Has dividend per share amount increased over the past?
- Is its earnings sufficient to payout dividend at the current rate?
- Based on future earnings growth, will it be able to continue to payout dividend at the current rate?
Does Canadian Pacific Railway pass our checks?
Canadian Pacific Railway has a trailing twelve-month payout ratio of 15%, which means that the dividend is covered by earnings. Going forward, analysts expect CP’s payout to increase to 17% of its earnings. Assuming a constant share price, this equates to a dividend yield of 1.2%. However, EPS is forecasted to fall to CA$15.67 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.
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. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.
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 Canadian Pacific Railway 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.
In terms of its peers, Canadian Pacific Railway has a yield of 1.1%, which is on the low-side for Transportation stocks.
Now you know to keep in mind the reason why investors should be careful investing in Canadian Pacific Railway 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, 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. Below, I’ve compiled three important factors you should look at:
- Future Outlook: What are well-informed industry analysts predicting for CP’s future growth? Take a look at our free research report of analyst consensus for CP’s outlook.
- Valuation: What is CP 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 CP is currently mispriced by the market.
- 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.