Is Dolby Laboratories Inc (NYSE:DLB) A Smart Pick For Income Investors?

A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Dolby Laboratories Inc (NYSE:DLB) has paid a dividend to shareholders in the last few years. It currently yields 1.1%. Does Dolby Laboratories tick all the boxes of a great dividend stock? Below, I'll take you through my analysis.

View our latest analysis for Dolby Laboratories

5 questions to ask before buying a dividend stock

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

• Is their annual yield among the top 25% of dividend payers?
• Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
• Has it increased its dividend per share amount over the past?
• Can it afford 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 Dolby Laboratories fit our criteria?

The current trailing twelve-month payout ratio for the stock is 57%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting lower payout ratio of 24%, leading to a dividend yield of around 1.2%. However, EPS should increase to $2.45, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When thinking about whether a dividend is sustainable, another factor to consider is the cash flow. Companies with strong cash flow can sustain a higher payout ratio, while companies with weaker cash flow generally cannot.

If there is one thing that you want to be reliable in your life, it's dividend stocks and their constant income stream. The reality is that it is too early to consider Dolby Laboratories as a dividend investment. It has only been consistently paying dividends for 4 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Compared to its peers, Dolby Laboratories generates a yield of 1.1%, which is on the low-side for Electronic stocks.

Next Steps:

After digging a little deeper into Dolby Laboratories'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. There are three essential factors you should further examine:

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