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Dividend Investors: Don't Be Too Quick To Buy Gear Energy Ltd. (TSE:GXE) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Gear Energy Ltd. (TSE:GXE) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Thus, you can purchase Gear Energy's shares before the 14th of March in order to receive the dividend, which the company will pay on the 29th of March.

The company's next dividend payment will be CA$0.005 per share, and in the last 12 months, the company paid a total of CA$0.06 per share. Based on the last year's worth of payments, Gear Energy stock has a trailing yield of around 9.1% on the current share price of CA$0.66. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Gear Energy

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Gear Energy paid out a disturbingly high 290% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the past year it paid out 163% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

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Cash is slightly more important than profit from a dividend perspective, but given Gear Energy's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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historic-dividend

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Gear Energy earnings per share are up 5.4% per annum over the last five years. Earnings per share have been growing steadily, although a payout ratio this high suggests future growth is likely to slow, and the dividend may also be at risk of a cut if business enters a downturn.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Gear Energy has delivered an average of 22% per year annual increase in its dividend, based on the past two years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Gear Energy worth buying for its dividend? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. It's not that we think Gear Energy is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Gear Energy don't faze you, it's worth being mindful of the risks involved with this business. For instance, we've identified 2 warning signs for Gear Energy (1 is a bit unpleasant) you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.