Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. Historically, Lancaster Colony Corporation (NASDAQ:LANC) has been paying a dividend to shareholders. Today it yields 1.5%. Does Lancaster Colony tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.

See our latest analysis for Lancaster Colony

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5 questions I ask before picking a dividend stock

When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:

• Is their annual yield among the top 25% of dividend payers?

• Does it consistently pay out dividends without missing a payment of significantly cutting payout?

• Has it increased its dividend per share amount over the past?

• Does earnings amply cover its dividend payments?

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

Does Lancaster Colony pass our checks?

The company currently pays out 45% of its earnings as a dividend, according to its trailing twelve-month data, meaning the dividend is sufficiently covered by earnings. Furthermore, analysts have not forecasted a dividends per share for the future, which makes it hard to determine the yield shareholders should expect, and whether the current payout is sustainable, moving forward.

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. A company with strong cash flow, relative to earnings, can sometimes sustain a high pay out ratio.

If there’s one type of stock you want to be reliable, it’s dividend stocks and their stable income-generating ability. In the case of LANC it has increased its DPS from $1.14 to $2.6 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.

Relative to peers, Lancaster Colony generates a yield of 1.5%, which is on the low-side for Food stocks.

Next Steps:

Considering the dividend attributes we analyzed above, Lancaster Colony is definitely worth keeping an eye on for someone looking to build a dedicated income 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. There are three important factors you should further examine:

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

2. Valuation: What is LANC 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 LANC 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.