Is Discover Financial Services (NYSE:DFS) An Attractive Dividend Stock?

Is Discover Financial Services (NYSE:DFS) a good dividend stock? How would you know? Dividend paying companies with growing earnings can be highly rewarding in the long term. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.

A 2.1% yield is nothing to get excited about, but investors probably think the long payment history suggests Discover Financial Services has some staying power. The company also bought back stock equivalent to around 7.8% of market capitalisation this year. Some simple research can reduce the risk of buying Discover Financial Services for its dividend – read on to learn more.

Explore this interactive chart for our latest analysis on Discover Financial Services!

NYSE:DFS Historical Dividend Yield, May 16th 2019
NYSE:DFS Historical Dividend Yield, May 16th 2019

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to be form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Discover Financial Services paid out 19% of its profit as dividends, over the trailing twelve month period. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.

Consider getting our latest analysis on Discover Financial Services’s financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Discover Financial Services has been paying dividends for a long time, but for the purpose of this analysis, we only examine the past 10 years of payments. During this period the dividend has been stable, which could imply the business could have relatively consistent earnings power. During the past ten-year period, the first annual payment was US$0.08 in 2009, compared to US$1.60 last year. Dividends per share have grown at approximately 35% per year over this time.

Dividend Growth Potential

While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend’s purchasing power over the long term. Strong earnings per share (EPS) growth might encourage our interest in the company despite fluctuating dividends, which is why it’s great to see Discover Financial Services has grown its earnings per share at 10% per annum over the past five years. Rapid earnings growth and a low payout ratio suggests this company has been effectively reinvesting in its business. Should that continue, this company could have a bright future.

Conclusion

To summarise, shareholders should always check that Discover Financial Services’s dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We’re glad to see Discover Financial Services has a low payout ratio, as this suggests earnings are being reinvested in the business. Next, growing earnings per share and steady dividend payments is a great combination.

Earnings growth generally bodes well for the future value of company dividend payments. See if the 19 Discover Financial Services analysts we track are forecasting continued growth with our free report on analyst estimates for the company.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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.