A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Ibstock plc (LON:IBST) has paid a dividend to shareholders in the last few years. It currently yields 3.6%. Let’s dig deeper into whether Ibstock should have a place in your portfolio.

View our latest analysis for Ibstock

How I analyze a dividend stock

When researching a dividend stock, I always follow the following screening criteria:

• Is it paying an annual yield above 75% of dividend payers?

• Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?

• Has dividend per share risen in the past couple of years?

• Can it afford 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?

How does Ibstock fare?

Ibstock has a trailing twelve-month payout ratio of 46%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting a higher payout ratio of 72% which, assuming the share price stays the same, leads to a dividend yield of 5.8%. However, EPS is forecasted to fall to £0.19 in the upcoming year. Therefore, although payout is expected to increase, the fall in earnings may not equate to higher dividend income.

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 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 Ibstock as a dividend investment. It has only been consistently paying dividends for 3 years, however, standard practice for reliable payers is to look for a 10-year minimum track record.

Relative to peers, Ibstock produces a yield of 3.6%, which is high for Basic Materials stocks but still below the market’s top dividend payers.

Next Steps:

If Ibstock is in your portfolio for cash-generating reasons, there may be better alternatives out there. 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. I’ve put together three essential aspects you should look at:

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

2. Valuation: What is IBST 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 IBST 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.