Don't Race Out To Buy Hearts and Minds Investments Limited (ASX:HM1) Just Because It's Going Ex-Dividend

Readers hoping to buy Hearts and Minds Investments Limited (ASX:HM1) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Hearts and Minds Investments' shares before the 6th of March to receive the dividend, which will be paid on the 18th of April.

The company's next dividend payment will be AU$0.07 per share, on the back of last year when the company paid a total of AU$0.14 to shareholders. Last year's total dividend payments show that Hearts and Minds Investments has a trailing yield of 5.3% on the current share price of AU$2.65. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Hearts and Minds Investments

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. Hearts and Minds Investments distributed an unsustainably high 141% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut.

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 Hearts and Minds Investments paid out over the last 12 months.

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. That's why it's not ideal to see Hearts and Minds Investments's earnings per share have been shrinking at 3.7% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Hearts and Minds Investments has delivered an average of 5.3% per year annual increase in its dividend, based on the past three years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Hearts and Minds Investments is already paying out 141% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

The Bottom Line

Has Hearts and Minds Investments got what it takes to maintain its dividend payments? Earnings per share are in decline and Hearts and Minds Investments is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. Hearts and Minds Investments 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.

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 Hearts and Minds Investments. Every company has risks, and we've spotted 1 warning sign for Hearts and Minds Investments you should know about.

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.