Don't Race Out To Buy Vonovia SE (ETR:VNA) Just Because It's Going Ex-Dividend

Readers hoping to buy Vonovia SE (ETR:VNA) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. This means that investors who purchase Vonovia's shares on or after the 9th of May will not receive the dividend, which will be paid on the 4th of June.

The company's upcoming dividend is €0.90 a share, following on from the last 12 months, when the company distributed a total of €0.90 per share to shareholders. Looking at the last 12 months of distributions, Vonovia has a trailing yield of approximately 3.2% on its current stock price of €28.12. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Vonovia

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. Vonovia reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Vonovia didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. The good news is it paid out just 19% of its free cash flow in the last year.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Vonovia reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

Vonovia also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Vonovia has lifted its dividend by approximately 2.5% a year on average.

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

To Sum It Up

Should investors buy Vonovia for the upcoming dividend? It's hard to get used to Vonovia paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not that we think Vonovia is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in Vonovia and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for Vonovia (1 is significant!) that deserve your attention before investing in the shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.