Is Avast Plc (LON:AVST) A Great Dividend Stock?

Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. Avast Plc (LON:AVST) has begun paying dividends recently. It now yields 2.2%. Should it have a place in your portfolio? Let's take a look at Avast in more detail.

Check out our latest analysis for Avast

5 checks you should do on 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 it increased its dividend per share amount 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?

How does Avast fare?

Avast has a trailing twelve-month payout ratio of 33%, which means that the dividend is covered by earnings. Going forward, analysts expect AVST's payout to increase to 42% of its earnings. Assuming a constant share price, this equates to a dividend yield of 2.9%. However, EPS is forecasted to fall to $0.19 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. 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. Unfortunately, it is really too early to view Avast as a dividend investment. Last year was the company's first dividend payment, so it is certainly early days. The standard practice for reliable payers is to look for 10 or so years of track record.

In terms of its peers, Avast produces a yield of 2.2%, which is on the low-side for Software stocks.

Next Steps:

If you are building an income portfolio, then Avast 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, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. There are three essential factors you should further examine:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.