Solution Dynamics Limited (NZSE:SDL) stock is about to trade ex-dividend in four days. You will need to purchase shares before the 11th of March to receive the dividend, which will be paid on the 26th of March.
Solution Dynamics's upcoming dividend is NZ$0.07 a share, following on from the last 12 months, when the company distributed a total of NZ$0.12 per share to shareholders. Based on the last year's worth of payments, Solution Dynamics has a trailing yield of 3.9% on the current stock price of NZ$3.1. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
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. Solution Dynamics paid out 71% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Solution Dynamics generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 13% of its cash flow last year.
It's positive to see that Solution Dynamics'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.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. For this reason, we're glad to see Solution Dynamics's earnings per share have risen 17% per annum over the last five years. Solution Dynamics has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last six years, Solution Dynamics has lifted its dividend by approximately 41% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Should investors buy Solution Dynamics for the upcoming dividend? Solution Dynamics's growing earnings per share and conservative payout ratios make for a decent combination. We also like that it paid out a lower percentage of its cash flow. Overall we think this is an attractive combination and worthy of further research.
While it's tempting to invest in Solution Dynamics for the dividends alone, you should always be mindful of the risks involved. For example - Solution Dynamics has 3 warning signs we think you should be aware of.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
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This article by Simply Wall St is general in nature. 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.
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