Here's Why We're Wary Of Buying YGM Trading's (HKG:375) For Its Upcoming Dividend

Readers hoping to buy YGM Trading Limited (HKG:375) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase YGM Trading's shares before the 4th of October in order to be eligible for the dividend, which will be paid on the 23rd of October.

The company's next dividend payment will be HK$0.10 per share, and in the last 12 months, the company paid a total of HK$0.10 per share. Based on the last year's worth of payments, YGM Trading stock has a trailing yield of around 8.3% on the current share price of HK$1.20. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether YGM Trading has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for YGM Trading

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. YGM Trading paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If YGM Trading 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. Thankfully its dividend payments took up just 42% of the free cash flow it generated, which is a comfortable payout ratio.

Click here to see how much of its profit YGM Trading paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. YGM Trading was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. YGM Trading's dividend payments per share have declined at 21% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Get our latest analysis on YGM Trading's balance sheet health here.

To Sum It Up

Has YGM Trading got what it takes to maintain its dividend payments? First, it's not great to see the company paying a dividend despite being loss-making over the last year. On the plus side, the dividend was covered by free cash flow." Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with YGM Trading. To that end, you should learn about the 4 warning signs we've spotted with YGM Trading (including 1 which is a bit concerning).

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.