We Wouldn't Be Too Quick To Buy Challenger Limited (ASX:CGF) Before It Goes Ex-Dividend

Challenger Limited (ASX:CGF) stock is about to trade ex-dividend in 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase Challenger's shares before the 28th of August in order to receive the dividend, which the company will pay on the 20th of September.

The company's next dividend payment will be AU$0.12 per share. Last year, in total, the company distributed AU$0.24 to shareholders. Last year's total dividend payments show that Challenger has a trailing yield of 3.6% on the current share price of A$6.73. If you buy this business for its dividend, you should have an idea of whether Challenger's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Challenger

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Challenger is paying out an acceptable 55% of its profit, a common payout level among most companies.

Generally speaking, the lower a company's payout ratios, the more resilient its dividend usually is.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Challenger's earnings are down 4.4% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Challenger has increased its dividend at approximately 1.8% a year on average.

The Bottom Line

Should investors buy Challenger for the upcoming dividend? We're not overly enthused to see Challenger's earnings in retreat at the same time as the company is paying out more than half of its earnings as dividends to shareholders. Challenger doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.

With that in mind though, if the poor dividend characteristics of Challenger don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 2 warning signs for Challenger you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.