Do These 3 Checks Before Buying IOOF Holdings Ltd (ASX:IFL) For Its Upcoming Dividend

Readers hoping to buy IOOF Holdings Ltd (ASX:IFL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 3rd of March in order to receive the dividend, which the company will pay on the 18th of March.

IOOF Holdings's upcoming dividend is AU$0.12 a share, following on from the last 12 months, when the company distributed a total of AU$0.23 per share to shareholders. Looking at the last 12 months of distributions, IOOF Holdings has a trailing yield of approximately 7.0% on its current stock price of A$3.28. 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 IOOF Holdings has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for IOOF Holdings

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. Last year IOOF Holdings paid out 101% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings.

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 the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by IOOF Holdings's 16% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

We'd also point out that IOOF Holdings issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. IOOF Holdings has seen its dividend decline 4.4% per annum on average over the past 10 years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Has IOOF Holdings got what it takes to maintain its dividend payments? Earnings per share are in decline and IOOF Holdings 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. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

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 IOOF Holdings. Be aware that IOOF Holdings is showing 3 warning signs in our investment analysis, and 1 of those is significant...

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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