Should You Buy Royal Mail plc (LON:RMG) 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. Royal Mail plc (LON:RMG) has paid a dividend to shareholders in the last few years. It currently yields 5.3%. Should it have a place in your portfolio? Let’s take a look at Royal Mail in more detail.

Check out our latest analysis for Royal Mail

Here’s how I find good dividend stocks

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

• Is it the top 25% annual dividend yield payer?

• Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?

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

• Does earnings amply cover its dividend payments?

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

How well does Royal Mail fit our criteria?

The company currently pays out 92.6% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is not sufficiently covered by its earnings. In the near future, analysts are predicting a more sensible payout ratio of 66.3%, leading to a dividend yield of 5.8%. Furthermore, EPS should increase to £0.37, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

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 Royal Mail 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, Royal Mail generates a yield of 5.3%, which is high for Logistics stocks.

Next Steps:

If you are building an income portfolio, then Royal Mail is a complicated choice since it has some positive aspects as well as negative ones. 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 urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. Below, I’ve compiled three pertinent factors you should further examine:

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

2. Valuation: What is RMG 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 RMG 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.