Should Open Text Corporation (NASDAQ:OTEX) Be Part Of Your Portfolio?

A large part of investment returns can be generated by dividend-paying stock given their role in compounding returns over time. Historically, Open Text Corporation (NASDAQ:OTEX) has paid dividends to shareholders, and these days it yields 1.9%. Should it have a place in your portfolio? Let's take a look at Open Text in more detail.

Check out our latest analysis for Open Text

5 questions I ask before picking a dividend stock

Whenever I am looking at a potential dividend stock investment, I always check these five metrics:

• Is it the top 25% annual dividend yield payer?
• Has it paid dividend every year without dramatically reducing payout in the past?
• Has dividend per share amount increased over the past?
• Does earnings amply cover its dividend payments?
• Will it be able to continue to payout at the current rate in the future?

How well does Open Text fit our criteria?

Open Text has a trailing twelve-month payout ratio of 63%, which means that the dividend is covered by earnings. However, going forward, analysts expect OTEX's payout to fall to 23% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 2.1%. However, EPS should increase to $1.24, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When considering the sustainability of dividends, it is also worth checking the cash flow of a company. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.

If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you're eyeing out is reliable in its payments. The reality is that it is too early to consider Open Text as a dividend investment. It has only been consistently paying dividends for 6 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Relative to peers, Open Text generates a yield of 1.9%, which is high for Software stocks but still below the market's top dividend payers.

Next Steps:

If you are building an income portfolio, then Open Text is a complicated choice since it has some positive aspects as well as negative ones. 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, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. I've put together three relevant aspects you should look at:

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.