Should Software Aktiengesellschaft (ETR:SOW) Be Part Of Your Dividend Portfolio?

Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Software Aktiengesellschaft (ETR:SOW) has begun paying dividends recently. It now yields 2.0%. Does Software tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

Check out our latest analysis for Software

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5 questions I ask before picking 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 amount increased over the past?
  • Can it afford to pay the current rate of dividends from its earnings?
  • Based on future earnings growth, will it be able to continue to payout dividend at the current rate?
XTRA:SOW Historical Dividend Yield January 29th 19
XTRA:SOW Historical Dividend Yield January 29th 19

How does Software fare?

The company currently pays out 32% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting a payout ratio of 29% which, assuming the share price stays the same, leads to a dividend yield of 2.3%. In addition to this, EPS should increase to €2.25.

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 company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.

If there is one thing that you want to be reliable in your life, it’s dividend stocks and their constant income stream. The reality is that it is too early to consider Software as a dividend investment. It has only been paying out dividend for the past one year. Generally, the rule of thumb for determining whether a stock is a reliable dividend payer is that it should be consistently paying dividends for the past 10 years or more. Clearly there’s a long road ahead before we can ascertain whether SOW one as a stable dividend player.

Relative to peers, Software has a yield of 2.0%, which is high for Software stocks but still below the market’s top dividend payers.

Next Steps:

If you are building an income portfolio, then Software is a complicated choice since it has some positive aspects as well as negative ones. However, if you are not strictly just a dividend investor, the stock could still offer some interesting investment opportunities. 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 fundamental aspects you should further research:

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