Should The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) Be Part Of Your Dividend Portfolio?

Could The Bank of N.T. Butterfield & Son Limited (NYSE:NTB) be an attractive dividend share to own for the long haul? Investors are often drawn to strong companies with the idea of reinvesting the dividends. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

In this case, Bank of N.T. Butterfield & Son likely looks attractive to dividend investors, given its 4.5% dividend yield and five-year payment history. It sure looks interesting on these metrics - but there's always more to the story. During the year, the company also conducted a buyback equivalent to around 2.7% of its market capitalisation. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. Comparing dividend payments to a company's net profit after tax is a simple way of reality-checking whether a dividend is sustainable. In the last year, Bank of N.T. Butterfield & Son paid out 59% of its profit as dividends. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Remember, you can always get a snapshot of Bank of N.T. Butterfield & Son's latest financial position, by checking our visualisation of its financial health.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Bank of N.T. Butterfield & Son has been paying a dividend for the past five years. During the past five-year period, the first annual payment was US$0.4 in 2016, compared to US$1.8 last year. Dividends per share have grown at approximately 34% per year over this time.

We're not overly excited about the relatively short history of dividend payments, however the dividend is growing at a nice rate and we might take a closer look.

Dividend Growth Potential

Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. It's good to see Bank of N.T. Butterfield & Son has been growing its earnings per share at 18% a year over the past five years. Earnings per share have been growing rapidly, but given that it is paying out more than half of its earnings as dividends, we wonder how Bank of N.T. Butterfield & Son will keep funding its growth projects in the future.

Conclusion

To summarise, shareholders should always check that Bank of N.T. Butterfield & Son's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think Bank of N.T. Butterfield & Son has an acceptable payout ratio. Next, earnings growth has been good, but unfortunately the company has not been paying dividends as long as we'd like. Bank of N.T. Butterfield & Son might not be a bad business, but it doesn't show all of the characteristics we look for in a dividend stock.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Bank of N.T. Butterfield & Son that investors need to be conscious of moving forward.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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. 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. Simply Wall St has no position in any stocks mentioned.
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