Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. Historically, Rolls-Royce Holdings plc (LON:RR.) has been paying a dividend to shareholders. Today it yields 1.3%. Should it have a place in your portfolio? Let’s take a look at Rolls-Royce Holdings in more detail.
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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 its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
- Has the amount of dividend per share grown over the past?
- Is its earnings sufficient to payout dividend at the current rate?
- Will it have the ability to keep paying its dividends going forward?
Does Rolls-Royce Holdings pass our checks?
Rolls-Royce Holdings has a trailing twelve-month payout ratio of 10%, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect RR.’s payout to increase to 41% of its earnings. Assuming a constant share price, this equates to a dividend yield of 2.1%. However, EPS is forecasted to fall to £0.23 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.
When considering the sustainability of dividends, it is also worth checking the cash flow of a company. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.
If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. Not only have dividend payouts from Rolls-Royce Holdings fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. These characteristics do not bode well for income investors seeking reliable stream of dividends.
Relative to peers, Rolls-Royce Holdings generates a yield of 1.3%, which is on the low-side for Aerospace & Defense stocks.
Now you know to keep in mind the reason why investors should be careful investing in Rolls-Royce Holdings for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. 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 key aspects you should look at:
- Future Outlook: What are well-informed industry analysts predicting for RR.’s future growth? Take a look at our free research report of analyst consensus for RR.’s outlook.
- Valuation: What is RR. 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 RR. 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.