Here's Why We're Wary Of Buying Orchard Funding Group's (LON:ORCH) For Its Upcoming 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 Orchard Funding Group plc (LON:ORCH) is about to go ex-dividend in just three days. You can purchase shares before the 10th of December in order to receive the dividend, which the company will pay on the 18th of December.

Orchard Funding Group's next dividend payment will be UK£0.02 per share, on the back of last year when the company paid a total of UK£0.03 to shareholders. Based on the last year's worth of payments, Orchard Funding Group stock has a trailing yield of around 5.0% on the current share price of £0.6. If you buy this business for its dividend, you should have an idea of whether Orchard Funding Group's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Orchard Funding Group

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. Orchard Funding Group paid out more than half (50%) of its earnings last year, which is a regular payout ratio for most companies.

When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.

Click here to see how much of its profit Orchard Funding Group paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Orchard Funding Group's 7.4% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Orchard Funding Group has delivered an average of 1.3% per year annual increase in its dividend, based on the past five years of dividend payments.

Final Takeaway

Is Orchard Funding Group worth buying for its dividend? Earnings per share have been declining and the company is paying out more than half its profits to shareholders; not an enticing combination. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

With that in mind though, if the poor dividend characteristics of Orchard Funding Group don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 4 warning signs for Orchard Funding Group and you should be aware of them before buying any shares.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting 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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