Should You Buy Synchrony Financial (NYSE:SYF) For Its Dividend?

A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Synchrony Financial (NYSE:SYF) has paid a dividend to shareholders in the last few years. It currently yields 2.6%. Does Synchrony Financial tick all the boxes of a great dividend stock? Below, I'll take you through my analysis.

See our latest analysis for Synchrony Financial

5 questions I ask before picking a dividend stock

When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:

• Is it paying an annual yield above 75% of dividend payers?
• Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
• Has the amount of dividend per share grown over the past?
• Can it afford to pay the current rate of dividends from its earnings?
• Will the company be able to keep paying dividend based on the future earnings growth?

How well does Synchrony Financial fit our criteria?

The company currently pays out 19% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. Going forward, analysts expect SYF's payout to increase to 34% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 3.1%. Moreover, EPS should increase to $4.76. The higher payout forecasted, along with higher earnings, should lead to greater dividend income for investors moving forward.

When considering the sustainability of dividends, it is also worth checking the cash flow of a company. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.

If there is one thing that you want to be reliable in your life, it's dividend stocks and their constant income stream. Unfortunately, it is really too early to view Synchrony Financial 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.

Relative to peers, Synchrony Financial has a yield of 2.6%, which is high for Consumer Finance stocks but still below the market's top dividend payers.

Next Steps:

Whilst there are few things you may like about Synchrony Financial from a dividend stock perspective, the truth is that overall it probably is not the best choice for a dividend investor. 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, 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. Below, I've compiled three essential aspects you should further research:

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