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Don't Buy Argo Investments Limited (ASX:ARG) For Its Next Dividend Without Doing These Checks

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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Argo Investments Limited (ASX:ARG) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Argo Investments' shares before the 27th of August in order to be eligible for the dividend, which will be paid on the 17th of September.

The company's upcoming dividend is AU$0.14 a share, following on from the last 12 months, when the company distributed a total of AU$0.30 per share to shareholders. Looking at the last 12 months of distributions, Argo Investments has a trailing yield of approximately 2.9% on its current stock price of A$9.65. 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 Argo Investments

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Argo Investments distributed an unsustainably high 136% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.

Click here to see how much of its profit Argo Investments paid out over the last 12 months.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Argo Investments's earnings per share have dropped 9.8% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Argo Investments has increased its dividend at approximately 0.7% a year on average.

To Sum It Up

Is Argo Investments an attractive dividend stock, or better left on the shelf? Earnings per share are in decline and Argo Investments is paying out what we feel is an uncomfortably 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. Argo Investments 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.

With that being said, if you're still considering Argo Investments as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Argo Investments is showing 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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

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