Don't Race Out To Buy Mortgage Choice Limited (ASX:MOC) Just Because It's Going Ex-Dividend

Readers hoping to buy Mortgage Choice Limited (ASX:MOC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 25th of February will not receive the dividend, which will be paid on the 15th of April.

Mortgage Choice's next dividend payment will be AU$0.04 per share, on the back of last year when the company paid a total of AU$0.08 to shareholders. Based on the last year's worth of payments, Mortgage Choice has a trailing yield of 6.6% on the current stock price of A$1.22. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Mortgage Choice can afford its dividend, and if the dividend could grow.

View our latest analysis for Mortgage Choice

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year Mortgage Choice paid out 98% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings.

When the dividend payout ratio is high, as it is in this case, the dividend is usually at greater risk of being cut in the future.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Mortgage Choice's 13% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Mortgage Choice's dividend payments per share have declined at 4.7% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Is Mortgage Choice worth buying for its dividend? Earnings per share are in decline and Mortgage Choice 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. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

So if you're still interested in Mortgage Choice despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Be aware that Mortgage Choice is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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