What To Know Before Buying Alliance Data Systems Corporation (NYSE:ADS) 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. Alliance Data Systems Corporation (NYSE:ADS) has paid a dividend to shareholders in the last few years. It currently yields 1.5%. Does Alliance Data Systems tick all the boxes of a great dividend stock? Below, I'll take you through my analysis.

See our latest analysis for Alliance Data Systems

5 checks you should do on 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 it paid dividend every year without dramatically reducing payout in the past?
• Has dividend per share risen in the past couple of years?
• Is is able to pay the current rate of dividends from its earnings?
• Will it have the ability to keep paying its dividends going forward?

How well does Alliance Data Systems fit our criteria?

Alliance Data Systems has a trailing twelve-month payout ratio of 13%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting lower payout ratio of 9.0% which, assuming the share price stays the same, leads to a dividend yield of around 1.5%. Moreover, EPS is also forecasted to fall to $16.49 in the upcoming year. The lower EPS on top of a lower payout ratio will lead to a fall in dividend payment moving forward.

If you want to dive deeper into the sustainability of a certain payout ratio, you may wish to consider the cash flow of the business. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.

Reliablity is an important factor for dividend stocks, particularly for income investors who want a strong track record of payment and a positive outlook for future payout. The reality is that it is too early to consider Alliance Data Systems as a dividend investment. It has only been consistently paying dividends for 2 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Compared to its peers, Alliance Data Systems has a yield of 1.5%, which is high for IT stocks but still below the market's top dividend payers.

Next Steps:

Taking all the above into account, Alliance Data Systems is a complicated pick for dividend investors given that there are a couple of positive things about it as well as negative. 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. Below, I've compiled three key factors you should further examine:

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