A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Baker Hughes, a GE company (NYSE:BHGE) has started paying a dividend to shareholders. It currently trades on a yield of 2.7%. Let's dig deeper into whether Baker Hughes a GE should have a place in your portfolio.
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 the top 25% annual dividend yield payer?
- Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
- Has the amount of dividend per share grown over the past?
- Is its earnings sufficient to payout dividend at the current rate?
- Will it have the ability to keep paying its dividends going forward?
Does Baker Hughes a GE pass our checks?
Baker Hughes a GE has a trailing twelve-month payout ratio of 158%, meaning the dividend is not sufficiently covered by its earnings. However, going forward, analysts expect BHGE's payout to fall into a more sustainable range of 29% of its earnings. Assuming a constant share price, this equates to a dividend yield of 2.8%. Furthermore, EPS should increase to $1.1, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
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 Baker Hughes a GE 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 BHGE one as a stable dividend player.
Compared to its peers, Baker Hughes a GE has a yield of 2.7%, which is on the low-side for Energy Services stocks.
After digging a little deeper into Baker Hughes a GE'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. Below, I've compiled three fundamental factors you should further examine:
- Future Outlook: What are well-informed industry analysts predicting for BHGE’s future growth? Take a look at our free research report of analyst consensus for BHGE’s outlook.
- Valuation: What is BHGE 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 BHGE is currently mispriced by the market.
- 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 email@example.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.
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