Consider This Before Buying AURELIUS Equity Opportunities SE & Co. KGaA (ETR:AR4) For The 3.5% Dividend

Today we'll take a closer look at AURELIUS Equity Opportunities SE & Co. KGaA (ETR:AR4) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With AURELIUS Equity Opportunities SE KGaA yielding 3.5% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. The company also bought back stock equivalent to around 0.8% of market capitalisation this year. That said, the recent jump in the share price will make AURELIUS Equity Opportunities SE KGaA's dividend yield look smaller, even though the company prospects could be improving. Before you buy any stock for its dividend however, you should always remember Warren Buffett's two rules: 1) Don't lose money, and 2) Remember rule #1. We'll run through some checks below to help with this.

Click the interactive chart for our full dividend analysis

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 75% of AURELIUS Equity Opportunities SE KGaA's profits were paid out as dividends in the last 12 months. Paying out a majority of its earnings limits the amount that can be reinvested in the business. This may indicate a commitment to paying a dividend, or a dearth of investment opportunities.

We update our data on AURELIUS Equity Opportunities SE KGaA every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. For the purpose of this article, we only scrutinise the last decade of AURELIUS Equity Opportunities SE KGaA's dividend payments. The dividend has been cut on at least one occasion historically. During the past 10-year period, the first annual payment was €0.4 in 2011, compared to €1.0 last year. This works out to be a compound annual growth rate (CAGR) of approximately 8.7% a year over that time. AURELIUS Equity Opportunities SE KGaA's dividend payments have fluctuated, so it hasn't grown 8.7% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.

A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth Potential

With a relatively unstable dividend, it's even more important to see if earnings per share (EPS) are growing. Why take the risk of a dividend getting cut, unless there's a good chance of bigger dividends in future? Over the past five years, it looks as though AURELIUS Equity Opportunities SE KGaA's EPS have declined at around 19% a year. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and AURELIUS Equity Opportunities SE KGaA's earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that AURELIUS Equity Opportunities SE KGaA's dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. First, we think AURELIUS Equity Opportunities SE KGaA has an acceptable payout ratio. Earnings per share have been falling, and the company has cut its dividend at least once in the past. From a dividend perspective, this is a cause for concern. To conclude, we've spotted a couple of potential concerns with AURELIUS Equity Opportunities SE KGaA that may make it less than ideal candidate for dividend investors.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. Taking the debate a bit further, we've identified 4 warning signs for AURELIUS Equity Opportunities SE KGaA that investors need to be conscious of moving forward.

If you are a dividend investor, you might also want to look at our curated list of dividend stocks yielding above 3%.

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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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