Investing in dividend-paying stocks is a popular strategy for those seeking regular income. These companies that provide dividends can create cash that comes through regardless of the market. Even during volatility, investors can look forward to cash flow as the company eventually recovers.

But not all companies are created equal. This is why today, we're going to dig into one dividend stock to see whether its 3.3% dividend yield is worth the buy.

National Bank performance

Today, we're going to get into National Bank of Canada (TSX:NA). In the third quarter of 2024, National Bank reported adjusted net income of $960 million, or $2.68 per share, up from $781 million, or $2.18 per share, in the same period the previous year. This growth was driven by strong performances in its wealth management and financial markets units.

Over the past five years, National Bank has demonstrated resilience and consistent growth. This includes a compound annual growth rate (CAGR) in earnings per share (EPS) of approximately 8%. The steady performance underscores the bank's ability to navigate various economic conditions.

Dividend strength

Earnings are great, but today, we're looking at dividends. So, let's dig into this next. National Bank stock has a strong track record of dividend payments. With a current annual dividend of $4.40 per share, yielding approximately 3.3%. The bank has consistently increased its dividend over the years, reflecting its commitment to returning value to shareholders.

Furthermore, National Bank stock's dividend payout ratio stands at around 42.84%, thus indicating it distributes less than half of its earnings as dividends. This conservative payout ratio suggests that the dividend is well-covered and sustainable.

Looking ahead

Analysts have set a 12-month average price target of $122.64 for National Bank's stock, suggesting a potential downside of about 7.19% from its current price of $132.14. However, the bank's strategic acquisition of Canadian Western Bank is expected to enhance its national presence and diversify its revenue streams, potentially offsetting near-term price target concerns.

While the bank has shown strong performance, potential investors should consider risks such as exposure to economic downturns, regulatory changes, and competition within the banking sector. However, National Bank's diversified operations and prudent management practices help mitigate these risks.

As of now, market analysts have mixed views on National Bank's stock, with some suggesting a hold due to the current valuation and potential downside. However, the bank's solid fundamentals and growth prospects provide a counterbalance to these concerns.

Bottom line

With a trailing price-to-earnings (P/E) ratio of approximately 12.89, National Bank's stock is valued reasonably compared to industry peers. This suggests that the stock is neither overvalued nor undervalued, providing a fair entry point for investors.

Compared to other major Canadian banks, National Bank's dividend yield is competitive. Its focus on domestic growth and strategic acquisitions positions it well against peers with more international exposure.

National Bank of Canada's consistent earnings growth, sustainable dividend payout, and strategic initiatives make it an attractive option for dividend-focused investors. There are inherent risks, of course. Yet the bank's strong fundamentals and prudent management suggest that its 3.3% dividend yield is both attractive and sustainable.