Should You Buy McChip Resources Inc. (CVE:MCS) For Its Upcoming Dividend?

McChip Resources Inc. (CVE:MCS) stock is about to trade ex-dividend in three 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. 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. In other words, investors can purchase McChip Resources' shares before the 12th of December in order to be eligible for the dividend, which will be paid on the 19th of December.

The company's next dividend payment will be CA$0.05 per share. Last year, in total, the company distributed CA$0.04 to shareholders. Looking at the last 12 months of distributions, McChip Resources has a trailing yield of approximately 4.7% on its current stock price of CA$0.85. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for McChip Resources

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. McChip Resources paid out just 6.9% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow.

Click here to see how much of its profit McChip Resources paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see McChip Resources's earnings per share have risen 13% per annum over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. McChip Resources's dividend payments per share have declined at 2.2% per year on average over the past 10 years, which is uninspiring. It's unusual to see earnings per share increasing at the same time as dividends per share have been in decline. We'd hope it's because the company is reinvesting heavily in its business, but it could also suggest business is lumpy.

Final Takeaway

Should investors buy McChip Resources for the upcoming dividend? We like that McChip Resources has been successfully growing its earnings per share at a nice rate and reinvesting most of its profits in the business. However, we note the high cashflow payout ratio with some concern. To summarise, McChip Resources looks okay on this analysis, although it doesn't appear a stand-out opportunity.

In light of that, while McChip Resources has an appealing dividend, it's worth knowing the risks involved with this stock. To that end, you should learn about the 5 warning signs we've spotted with McChip Resources (including 3 which are a bit concerning).

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.