Why SDL plc (LON:SDL)’s 1.24% Dividend Is Not A Good Reason To Buy

Dividends can be underrated but they form a large part of investment returns, playing an important role in compounding returns in the long run. SDL plc (LON:SDL) has returned to shareholders over the past 7 years, an average dividend yield of 1.00% annually. Does SDL tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

View our latest analysis for SDL

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:

• Does it pay an annual yield higher than 75% of dividend payers?

• Has it paid dividend every year without dramatically reducing payout in the past?

• Has the amount of dividend per share grown over the past?

• Is is able 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?

LSE:SDL Historical Dividend Yield August 7th 18

How does SDL fare?

The current trailing twelve-month payout ratio for the stock is 36.82%, which means that the dividend is covered by earnings. In the near future, analysts are predicting lower payout ratio of 24.68%, leading to a dividend yield of around 1.37%. Furthermore, EPS is also forecasted to fall to £0.16 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 there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. Unfortunately, it is really too early to view SDL as a dividend investment. It has only been consistently paying dividends for 7 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

In terms of its peers, SDL generates a yield of 1.24%, which is on the low-side for Software stocks.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in SDL for the dividend. But if you are not exclusively a dividend investor, the stock could still be an interesting investment opportunity. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. There are three fundamental aspects you should further examine:

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

2. Valuation: What is SDL 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 SDL 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.