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There is a lot to be liked about Sodexo S.A. (EPA:SW) as an income stock. It has paid dividends over the past 10 years. The stock currently pays out a dividend yield of 3.2%, and has a market cap of €14b. Does Sodexo tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

View our latest analysis for Sodexo

Here’s how I find good dividend stocks

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

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

• 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?

• Is is able to pay the current rate of dividends from its earnings?

• Based on future earnings growth, will it be able to continue to payout dividend at the current rate?

How well does Sodexo fit our criteria?

The current trailing twelve-month payout ratio for the stock is 63%, which means that the dividend is covered by earnings. However, going forward, analysts expect SW’s payout to fall to 54% of its earnings. Assuming a constant share price, this equates to a dividend yield of around 3.2%. However, EPS should increase to €5, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.

When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.

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. SW has increased its DPS from €1.27 to €3.03 in the past 10 years. It has also been paying out dividend consistently during this time, as you’d expect for a company increasing its dividend levels. These are all positive signs of a great, reliable dividend stock.

Compared to its peers, Sodexo generates a yield of 3.2%, which is high for Hospitality stocks but still below the market’s top dividend payers.

Next Steps:

With this in mind, I definitely rank Sodexo as a strong dividend stock, and makes it worth further research for anyone who likes steady income generation from their portfolio. 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. Below, I’ve compiled three pertinent aspects you should further examine:

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

2. Valuation: What is SW 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 SW is currently mispriced by the market.

3. Other 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.