Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!

A sizeable part of portfolio returns can be produced by dividend stocks due to their contribution to compounding returns in the long run. Reach Subsea ASA (OB:REACH) has started paying a dividend to shareholders. It currently trades on a yield of 3.3%. Let's dig deeper into whether Reach Subsea should have a place in your portfolio.

See our latest analysis for Reach Subsea

5 questions to ask before buying a dividend stock

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

• Is its annual yield among the top 25% of dividend-paying companies?

• 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?

• Is its earnings sufficient to payout dividend at the current rate?

• Will it have the ability to keep paying its dividends going forward?

How well does Reach Subsea fit our criteria?

Reach Subsea has a negative payout ratio, which is usually not ideal.

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.

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. Unfortunately, it is really too early to view Reach Subsea as a dividend investment. It has only been paying out dividend for the past one year. Generally, the rule of thumb for determining whether a stock is a reliable dividend payer is that it should be consistently paying dividends for the past 10 years or more. Clearly there's a long road ahead before we can ascertain whether REACH one as a stable dividend player.

Compared to its peers, Reach Subsea has a yield of 3.3%, which is on the low-side for Energy Services stocks.

Next Steps:

Now you know to keep in mind the reason why investors should be careful investing in Reach Subsea 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, you should always research extensively before deciding whether or not a stock is an appropriate investment for you. I always recommend analysing the company's fundamentals and underlying business before making an investment decision. I've put together three pertinent factors you should look at:

1. Valuation: What is REACH 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 REACH is currently mispriced by the market.

2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Reach Subsea’s board and the CEO’s back ground.

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.