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It looks like Australian Foundation Investment Company Limited (ASX:AFI) is about to go ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Australian Foundation Investment's shares before the 11th of August in order to be eligible for the dividend, which will be paid on the 31st of August.
The company's next dividend payment will be AU$0.14 per share, on the back of last year when the company paid a total of AU$0.24 to shareholders. Last year's total dividend payments show that Australian Foundation Investment has a trailing yield of 2.8% on the current share price of A$8.56. If you buy this business for its dividend, you should have an idea of whether Australian Foundation Investment's dividend is reliable and sustainable. As a result, readers should always check whether Australian Foundation Investment has been able to grow its dividends, or if the dividend might be cut.
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. Australian Foundation Investment paid out 124% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.
Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Australian Foundation Investment's earnings are down 4.1% a year over the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Australian Foundation Investment has delivered an average of 1.3% per year annual increase in its dividend, based on the past 10 years of dividend payments.
The Bottom Line
Should investors buy Australian Foundation Investment for the upcoming dividend? Not only are earnings per share shrinking, but Australian Foundation Investment is paying out a disconcertingly high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. Australian Foundation Investment doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.
So if you're still interested in Australian Foundation Investment despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, Australian Foundation Investment has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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. 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.
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