Should You Buy Dunelm Group plc (LON:DNLM) For Its Upcoming Dividend?

Dunelm Group plc (LON:DNLM) stock is about to trade ex-dividend in 3 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. 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. Therefore, if you purchase Dunelm Group's shares on or after the 14th of March, you won't be eligible to receive the dividend, when it is paid on the 9th of April.

The company's upcoming dividend is UK£0.51 a share, following on from the last 12 months, when the company distributed a total of UK£0.78 per share to shareholders. Based on the last year's worth of payments, Dunelm Group has a trailing yield of 6.7% on the current stock price of UK£11.58. If you buy this business for its dividend, you should have an idea of whether Dunelm Group's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Dunelm 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. Dunelm Group paid out 58% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 40% of its free cash flow in the past year.

It's positive to see that Dunelm Group'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 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 Dunelm Group's earnings per share have risen 15% per annum over the last five years. Dunelm Group has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Dunelm Group has lifted its dividend by approximately 17% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Is Dunelm Group worth buying for its dividend? We like Dunelm Group's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. It's a promising combination that should mark this company worthy of closer attention.

So while Dunelm Group looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Every company has risks, and we've spotted 1 warning sign for Dunelm Group you should know about.

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.