Do These 3 Checks Before Buying Australian Foundation Investment Company Limited (ASX:AFI) For Its Upcoming Dividend

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Australian Foundation Investment Company Limited (ASX:AFI) is about to go ex-dividend in just four days. 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. 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 11th of August, you won't be eligible to receive the dividend, when it is paid on the 31st of August.

The company's next dividend payment will be AU$0.14 per share, on the back of last year when the company paid a total of AU$0.24 to shareholders. Based on the last year's worth of payments, Australian Foundation Investment has a trailing yield of 2.8% on the current stock price of A$8.56. 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! We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Australian Foundation Investment

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. Australian Foundation Investment distributed an unsustainably high 124% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

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

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 shrinking earnings are tricky from a dividend perspective. 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's why it's not ideal to see Australian Foundation Investment's earnings per share have been shrinking at 4.1% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Australian Foundation Investment has delivered 1.3% dividend growth per year on average over the past 10 years.

The Bottom Line

Is Australian Foundation Investment an attractive dividend stock, or better left on the shelf? Not only are earnings per share shrinking, but Australian Foundation Investment is paying out a disconcertingly 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. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

Although, if you're still interested in Australian Foundation Investment and want to know more, you'll find it very useful to know what risks this stock faces. Be aware that Australian Foundation Investment is showing 2 warning signs in our investment analysis, and 1 of those is significant...

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising 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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