Is SoftTech Engineers Limited (NSE:SOFTTECH) A Top Dividend Stock?

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Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. SoftTech Engineers Limited (NSE:SOFTTECH) has started paying a dividend to shareholders. It currently trades on a yield of 1.3%. Does SoftTech Engineers tick all the boxes of a great dividend stock? Below, I'll take you through my analysis.

View our latest analysis for SoftTech Engineers

How I analyze a dividend stock

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

• Is their annual yield among the top 25% of dividend payers?
• Has it paid dividend every year without dramatically reducing payout in the past?
• 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 be able to continue to payout at the current rate in the future?

Does SoftTech Engineers pass our checks?

The company currently pays out 4.9% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. Furthermore, analysts have not forecasted a dividends per share for the future, which makes it hard to determine the yield shareholders should expect, and whether the current payout is sustainable, moving forward.

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.

Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. The reality is that it is too early to consider SoftTech Engineers 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 SOFTTECH one as a stable dividend player.

In terms of its peers, SoftTech Engineers generates a yield of 1.3%, which is on the low-side for Software stocks.

Next Steps:

After digging a little deeper into SoftTech Engineers's yield, it's easy to see why you should be cautious investing in the company just 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, 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. There are three pertinent factors you should further research:

1. Future Outlook: What are well-informed industry analysts predicting for SOFTTECH’s future growth? Take a look at our free research report of analyst consensus for SOFTTECH’s outlook.
2. Historical Performance: What has SOFTTECH's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.