Here's Why We're Wary Of Buying Sumitomo Mitsui Trust Holdings' (TSE:8309) For Its Upcoming Dividend

Readers hoping to buy Sumitomo Mitsui Trust Holdings, Inc. (TSE:8309) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase Sumitomo Mitsui Trust Holdings' shares on or after the 27th of September will not receive the dividend, which will be paid on the 4th of December.

The company's upcoming dividend is JP¥72.50 a share, following on from the last 12 months, when the company distributed a total of JP¥135 per share to shareholders. Calculating the last year's worth of payments shows that Sumitomo Mitsui Trust Holdings has a trailing yield of 3.9% on the current share price of JP¥3466.00. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Sumitomo Mitsui Trust Holdings can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Sumitomo Mitsui Trust Holdings

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. Sumitomo Mitsui Trust Holdings paid out 73% of its earnings to investors last year, a normal payout level for most businesses.

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 the company's payout ratio, plus analyst estimates of its future dividends.

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. Sumitomo Mitsui Trust Holdings's earnings per share have fallen at approximately 7.9% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Sumitomo Mitsui Trust Holdings has delivered an average of 10% per year annual increase in its dividend, based on the past 10 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.

The Bottom Line

Is Sumitomo Mitsui Trust Holdings an attractive dividend stock, or better left on the shelf? We're not overly enthused to see Sumitomo Mitsui Trust Holdings's earnings in retreat at the same time as the company is paying out more than half of its earnings as dividends to shareholders. This is not an overtly appealing combination of characteristics, and we're just not that interested in this company's dividend.

With that in mind though, if the poor dividend characteristics of Sumitomo Mitsui Trust Holdings don't faze you, it's worth being mindful of the risks involved with this business. To help with this, we've discovered 1 warning sign for Sumitomo Mitsui Trust Holdings that you should be aware of before investing in their shares.

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.