Dividend Investors: Don't Be Too Quick To Buy Australian Foundation Investment Company Limited (ASX:AFI) For Its Upcoming Dividend

Australian Foundation Investment Company Limited (ASX:AFI) stock is about to trade ex-dividend in two days. The ex-dividend date is commonly two business days 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Australian Foundation Investment's shares on or after the 5th of August, you won't be eligible to receive the dividend, when it is paid on the 28th of August.

The company's upcoming dividend is AU$0.195 a share, following on from the last 12 months, when the company distributed a total of AU$0.27 per share to shareholders. Looking at the last 12 months of distributions, Australian Foundation Investment has a trailing yield of approximately 3.5% on its current stock price of AU$7.63. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Australian Foundation Investment has been able to grow its dividends, or if the dividend might be cut.

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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. Australian Foundation Investment paid out 117% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.

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

View our latest analysis for Australian Foundation Investment

Click here to see how much of its profit Australian Foundation Investment paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Australian Foundation Investment, with earnings per share up 2.7% on average over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Australian Foundation Investment has lifted its dividend by approximately 1.4% a year on average.

To Sum It Up

Has Australian Foundation Investment got what it takes to maintain its dividend payments? Australian Foundation Investment has been growing earnings per share at a reasonable rate, but over the last year its dividend was not well covered by earnings. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

With that in mind though, if the poor dividend characteristics of Australian Foundation Investment don't faze you, it's worth being mindful of the risks involved with this business. In terms of investment risks, we've identified 1 warning sign with Australian Foundation Investment and understanding them should be part of your investment process.

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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.