It Might Not Be A Great Idea To Buy Australian Foundation Investment Company Limited (ASX:AFI) For Its Next Dividend

Australian Foundation Investment Company Limited (ASX:AFI) stock is about to trade ex-dividend in 4 days. You will need to purchase shares before the 8th of February to receive the dividend, which will be paid on the 23rd of February.

Australian Foundation Investment's next dividend payment will be AU$0.10 per share. Last year, in total, the company distributed AU$0.24 to shareholders. Based on the last year's worth of payments, Australian Foundation Investment has a trailing yield of 3.2% on the current stock price of A$7.56. If you buy this business for its dividend, you should have an idea of whether Australian Foundation Investment's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Australian Foundation Investment

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Australian Foundation Investment distributed an unsustainably high 163% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

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. If earnings fall far enough, the company could be forced to cut its dividend. Australian Foundation Investment's earnings per share have fallen at approximately 12% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Australian Foundation Investment has lifted its dividend by approximately 1.3% a year on average.

The Bottom Line

Is Australian Foundation Investment an attractive dividend stock, or better left on the shelf? Earnings per share are in decline and Australian Foundation Investment 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. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Australian Foundation Investment. Case in point: We've spotted 1 warning sign for Australian Foundation Investment you should be aware of.

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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