Is Bank of the James Financial Group, Inc. (NASDAQ:BOTJ) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.
With a 2.6% yield and a six-year payment history, investors probably think Bank of the James Financial Group looks like a reliable dividend stock. While the yield may not look too great, the relatively long payment history is interesting. The company also returned around 0.7% of its market capitalisation to shareholders in the form of stock buybacks over the past year. Some simple analysis can reduce the risk of holding Bank of the James Financial Group for its dividend, and we’ll focus on the most important aspects below.
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NasdaqCM:BOTJ Historical Dividend Yield May 1st 2020
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company’s net income after tax. Bank of the James Financial Group paid out 21% of its profit as dividends, over the trailing twelve month period. We like this low payout ratio, because it implies the dividend is well covered and leaves ample opportunity for reinvestment.
Consider getting our latest analysis on Bank of the James Financial Group’s financial position here.
Dividend Volatility
Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. Bank of the James Financial Group has been paying a dividend for the past six years. The dividend has been quite stable over the past six years, which is great to see – although we usually like to see the dividend maintained for a decade before giving it full marks, though. During the past six-year period, the first annual payment was US$0.20 in 2014, compared to US$0.28 last year. Dividends per share have grown at approximately 5.8% per year over this time.
Bank of the James Financial Group has been growing its dividend at a decent rate, and the payments have been stable despite the short payment history. This is a positive start.
Dividend Growth Potential
Dividend payments have been consistent over the past few years, but we should always check if earnings per share (EPS) are growing, as this will help maintain the purchasing power of the dividend. Bank of the James Financial Group has grown its earnings per share at 3.9% per annum over the past five years. So, we know earnings growth has been thin on the ground. However, at least the payout ratio is conservative, and there is plenty of potential to increase this over time.
Conclusion
When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. We’re glad to see Bank of the James Financial Group has a low payout ratio, as this suggests earnings are being reinvested in the business. Unfortunately, earnings growth has also been mediocre, and we think it has not been paying dividends long enough to demonstrate resilience across economic cycles. Bank of the James Financial Group might not be a bad business, but it doesn’t show all of the characteristics we look for in a dividend stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we’ve picked out 2 warning signs for Bank of the James Financial Group that investors should take into consideration.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
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.
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