Should Income Investors Look At Surge Energy Inc. (TSE:SGY) Before Its Ex-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 Surge Energy Inc. (TSE:SGY) is about to go ex-dividend in just three 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. This means that investors who purchase Surge Energy's shares on or after the 31st of July will not receive the dividend, which will be paid on the 15th of August.

The company's next dividend payment will be CA$0.043333 per share. Last year, in total, the company distributed CA$0.52 to shareholders. Last year's total dividend payments show that Surge Energy has a trailing yield of 7.3% on the current share price of CA$7.14. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Surge Energy can afford its dividend, and if the dividend could grow.

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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. Surge Energy reported a loss last year, so it's not great to see that it has continued paying a dividend. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. Dividends consumed 54% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

View our latest analysis for Surge Energy

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Surge Energy was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Surge Energy has seen its dividend decline 20% per annum on average over the past 10 years, which is not great to see.

Remember, you can always get a snapshot of Surge Energy's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Should investors buy Surge Energy for the upcoming dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

So if you want to do more digging on Surge Energy, you'll find it worthwhile knowing the risks that this stock faces. For example - Surge Energy has 1 warning sign we think 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.