Investors looking for a steady income stream often turn to dividend-paying stocks. But the strategy is not simply about chasing the highest yield; it requires a balanced approach that considers the sustainability of those payouts and the underlying health of the business. A common screening method to find such opportunities starts with a strong dividend rating, but layers on additional filters for profitability and financial health. The logic is straightforward: a company paying a solid dividend is only attractive if it can afford to keep doing so and is not hindered by debt or operational issues. One stock that emerges from this type of screen is KENNAMETAL INC (NYSE:KMT).
Dividend Strength and Reliability
At the core of any dividend-focused strategy is the company's ability and willingness to pay shareholders. Kennametal scores a solid 7 out of 10 on the ChartMill Dividend Rating, a composite score that looks at yield, history, and sustainability.
- Yield: The stock offers a dividend yield of 2.03%. While not astronomical, this is notably higher than its industry average of 1.13%, placing it in the top tier of its sector. It also compares favorably to the S&P 500 average yield of 1.82%, meaning an investor gets a better income return here than from the broad market.
- Track Record: Kennametal has paid a consistent dividend for over 10 years and has not decreased its payout during that time. This long, non-decreasing history signals a commitment to returning capital to shareholders, which is a key psychological comfort for income investors.
- Sustainability: Perhaps the most critical aspect for a dividend investor is whether the payout is safe. Kennametal's payout ratio sits at 55.39%. This means just over half of its earnings are being used to fund the dividend, leaving plenty of room for reinvestment in the business and providing a solid buffer against any earnings volatility. Furthermore, the earnings are growing faster than the dividend, which suggests the payout ratio could actually decrease over time, making the dividend even more secure.
This combination of a respectable yield, a long track record, and a sustainable payout ratio makes Kennametal an excellent candidate for a dividend-focused portfolio, directly addressing the core requirements of the screening strategy.
Decent Profitability and Financial Health
While the dividend rating is the star of the show, the screen also requires a minimum level of profitability and health to ensure the company is a stable platform for that dividend. Kennametal scores a 5 out of 10 in both categories, which while not market-leading, indicates a fundamentally sound company without glaring red flags.
- Profitability: The company has been profitable for the last five consecutive years and has generated positive operating cash flow each year. Its profit margin of 5.43% and return on equity of 8.38% are in line with its industry peers. While not a high-growth dynamo, it is a steady, profitable operator that can comfortably fund its dividend.
- Financial Health: The balance sheet is in decent shape. The Altman-Z score of 3.38 suggests a very low risk of bankruptcy. The current ratio stands at 2.55, indicating the company has ample short-term assets to cover its immediate liabilities. While the Debt to Equity ratio of 0.46 is manageable, a more in-depth look at its solvency can be found in the full fundamental analysis report.
The health rating ensures that the company is not taking on excessive risk that could jeopardize future dividend payments. The profitability rating ensures the business model is sound. Both are essential checks for an investor planning to hold a stock for the long term.
Growth Potential
A dividend stock does not have to be a stagnant business. In fact, earnings growth is a strong driver of future dividend increases. Kennametal shows promise in this area with a Growth Rating of 6 out of 10.
- Recent Past: Earnings per share (EPS) grew by a substantial 21.80% over the past year.
- Future Outlook: Analysts expect EPS to grow by an impressive 24.02% per year on average over the next few years. This expected growth is accelerating compared to the historical rate, which is a very positive sign for the potential of future dividend hikes.
This growth trajectory reinforces the sustainability of the current dividend and provides a strong basis for expecting the company to raise its payout in the future, a key driver of total return for long-term investors.
Finding More Opportunities
Kennametal serves as a great example of how a disciplined screening approach can uncover high-quality dividend stocks. It meets the criteria of a high ChartMill Dividend Rating while maintaining the decent profitability and health needed to sustain it.
For investors looking to build a portfolio of similar opportunities, the same screen can be run to find more candidates. You can run the Best Dividend Stocks screen to explore the full list of stocks that pass these stringent filters and find your next income-generating investment.
Disclaimer: This article is for informational and educational purposes only and does not constitute investment advice. Individual financial situations vary, and readers should conduct their own research or consult with a qualified financial advisor before making any investment decisions. Past performance is not a guarantee of future results.