Be Careful About Buying Meridian Energy Limited (NZE:MEL) For The 5.01% Dividend

By
Simply Wall St
Published
January 30, 2018
NZSE:MEL

Dividends play an important role in compounding returns in the long run and end up forming a sizeable part of investment returns. In the past 3 years Meridian Energy Limited (NZSE:MEL) has returned an average of 5.00% per year to investors in the form of dividend payouts. Let's dig deeper into whether Meridian Energy should have a place in your portfolio. View our latest analysis for Meridian Energy

5 questions I ask before picking a dividend stock

If you are a dividend investor, you should always assess these five key metrics:

  • Is their annual yield among the top 25% of dividend payers?
  • Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
  • 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?

NZSE:MEL Historical Dividend Yield Jan 30th 18
NZSE:MEL Historical Dividend Yield Jan 30th 18

Does Meridian Energy pass our checks?

Meridian Energy has a trailing twelve-month payout ratio of 182.53%, meaning the dividend is not sufficiently covered by its earnings. In the near future, analysts are predicting a payout ratio of 174.56%, leading to a dividend yield of around 6.67%. Furthermore, EPS should increase to NZ$0.08. 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 Meridian Energy as a dividend investment. It has only been consistently paying dividends for 3 years, however, standard practice for reliable payers is to look for a 10-year minimum track record. In terms of its peers, Meridian Energy has a yield of 5.01%, which is high for Renewable Energy stocks.

Next Steps:

After digging a little deeper into Meridian Energy'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, 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 fundamental factors you should further examine:

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