Do These 3 Checks Before Buying Diversified Energy Company PLC (LON:DEC) For Its Upcoming Dividend

It looks like Diversified Energy Company PLC (LON:DEC) is about to go ex-dividend in the next 2 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Diversified Energy's shares on or after the 27th of February will not receive the dividend, which will be paid on the 31st of March.

The company's upcoming dividend is US$0.29 a share, following on from the last 12 months, when the company distributed a total of US$1.16 per share to shareholders. Based on the last year's worth of payments, Diversified Energy has a trailing yield of 8.3% on the current stock price of UK£11.13. If you buy this business for its dividend, you should have an idea of whether Diversified Energy's dividend is reliable and sustainable. So we need to investigate whether Diversified Energy can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Diversified Energy

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. Diversified Energy is paying out an acceptable 58% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year, it paid out more than three-quarters (87%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's positive to see that Diversified Energy's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Diversified Energy's earnings per share have dropped 23% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Diversified Energy has delivered an average of 14% per year annual increase in its dividend, based on the past eight years of dividend payments. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

To Sum It Up

Should investors buy Diversified Energy for the upcoming dividend? While earnings per share are shrinking, it's encouraging to see that at least Diversified Energy's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not that we think Diversified Energy is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Diversified Energy as an investment, you'll find it beneficial to know what risks this stock is facing. We've identified 4 warning signs with Diversified Energy (at least 2 which make us uncomfortable), and understanding these should be part of your investment process.

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.