Dividend Investors: Don't Be Too Quick To Buy Windsor Machines Limited (NSE:WINDMACHIN) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Windsor Machines Limited (NSE:WINDMACHIN) is about to trade ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. Meaning, you will need to purchase Windsor Machines' shares before the 22nd of September to receive the dividend, which will be paid on the 29th of October.

The company's next dividend payment will be ₹1.00 per share, on the back of last year when the company paid a total of ₹1.00 to shareholders. Last year's total dividend payments show that Windsor Machines has a trailing yield of 1.5% on the current share price of ₹69.1. 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 Windsor Machines has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Windsor Machines

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. Windsor Machines distributed an unsustainably high 139% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. 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. Windsor Machines paid out more free cash flow than it generated - 123%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Cash is slightly more important than profit from a dividend perspective, but given Windsor Machines's payments were not well covered by either earnings or cash flow, we are concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. 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 not enthused to see that Windsor Machines's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Windsor Machines has delivered an average of 4.9% per year annual increase in its dividend, based on the past six years of dividend payments.

The Bottom Line

Is Windsor Machines an attractive dividend stock, or better left on the shelf? It's been unable to generate earnings growth, yet is paying out an uncomfortably high percentage of both its profits (139%) and cash flow (123%) as dividends. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Windsor Machines.

With that in mind though, if the poor dividend characteristics of Windsor Machines don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 2 warning signs for Windsor Machines (of which 1 is potentially serious!) you should know about.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.