Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Open Text Corporation (NASDAQ:OTEX) is about to trade ex-dividend in the next three 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Open Text's shares before the 2nd of September to receive the dividend, which will be paid on the 24th of September.
The company's upcoming dividend is US$0.22 a share, following on from the last 12 months, when the company distributed a total of US$0.88 per share to shareholders. Looking at the last 12 months of distributions, Open Text has a trailing yield of approximately 1.6% on its current stock price of $54.48. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Open Text has been able to grow its dividends, or if the dividend might be cut.
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. Open Text is paying out an acceptable 68% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Open Text generated enough free cash flow to afford its dividend. Fortunately, it paid out only 26% of its free cash flow in the past year.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. That explains why we're not overly excited about Open Text's flat earnings over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last eight years, Open Text has lifted its dividend by approximately 14% a year on average.
Should investors buy Open Text for the upcoming dividend? The payout ratios appear reasonably conservative, which implies the dividend may be somewhat sustainable. Still, with earnings basically flat, Open Text doesn't stand out from a dividend perspective. All things considered, we are not particularly enthused about Open Text from a dividend perspective.
However if you're still interested in Open Text as a potential investment, you should definitely consider some of the risks involved with Open Text. To help with this, we've discovered 3 warning signs for Open Text that you should be aware of before investing in their shares.
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. 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.
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