It looks like Wells Fargo & Company (NYSE:WFC) is about to go ex-dividend in the next 4 days. This means that investors who purchase shares on or after the 6th of February will not receive the dividend, which will be paid on the 1st of March.
Wells Fargo’s next dividend payment will be US$0.51 per share, on the back of last year when the company paid a total of US$2.04 to shareholders. Calculating the last year’s worth of payments shows that Wells Fargo has a trailing yield of 4.3% on the current share price of $46.94. If you buy this business for its dividend, you should have an idea of whether Wells Fargo’s dividend is reliable and sustainable. So we need to investigate whether Wells Fargo can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Wells Fargo paid out a comfortable 47% of its profit last year.
When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.
Have Earnings And Dividends Been Growing?
Companies that aren’t growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That explains why we’re not overly excited about Wells Fargo’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.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Wells Fargo has delivered an average of 26% per year annual increase in its dividend, based on the past ten years of dividend payments.
To Sum It Up
From a dividend perspective, should investors buy or avoid Wells Fargo? Wells Fargo’s earnings per share have not grown at all in recent years, although we like that it is paying out a low percentage of its earnings. At best we would put it on a watch-list to see if business conditions improve, as it doesn’t look like a clear opportunity right now.
Curious what other investors think of Wells Fargo? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.
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.
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