Readers hoping to buy Ross Stores, Inc. (NASDAQ:ROST) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. Accordingly, Ross Stores investors that purchase the stock on or after the 5th of June will not receive the dividend, which will be paid on the 30th of June.
The company's next dividend payment will be US$0.34 per share, and in the last 12 months, the company paid a total of US$1.34 per share. Looking at the last 12 months of distributions, Ross Stores has a trailing yield of approximately 1.3% on its current stock price of $103.26. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
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. That's why it's good to see Ross Stores paying out a modest 28% of its earnings. A useful secondary check can be to evaluate whether Ross Stores generated enough free cash flow to afford its dividend. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.
It's positive to see that Ross Stores's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. 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 Ross Stores earnings per share are up 4.8% per annum over the last five years. Recent growth has not been impressive. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Ross Stores has delivered 17% dividend growth per year on average over the past 10 years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
Is Ross Stores worth buying for its dividend? Earnings per share have been growing moderately, and Ross Stores is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Ross Stores is halfway there. Ross Stores looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
So while Ross Stores looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example, we've found 1 warning sign for Ross Stores that we recommend you consider before investing in the business.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here