Don't Buy NetLink NBN Trust (SGX:CJLU) For Its Next Dividend Without Doing These Checks

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that NetLink NBN Trust (SGX:CJLU) is about to go ex-dividend in just three days. The ex-dividend date is usually set to be two business days 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Therefore, if you purchase NetLink NBN Trust's shares on or after the 14th of November, you won't be eligible to receive the dividend, when it is paid on the 28th of November.

The company's upcoming dividend is S$0.0271 a share, following on from the last 12 months, when the company distributed a total of S$0.054 per share to shareholders. Based on the last year's worth of payments, NetLink NBN Trust stock has a trailing yield of around 5.5% on the current share price of S$0.98. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. NetLink NBN Trust paid out a disturbingly high 232% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out dividends equivalent to 210% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how NetLink NBN Trust intends to continue funding this dividend, or if it could be forced to cut the payment.

As NetLink NBN Trust's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Check out our latest analysis for NetLink NBN Trust

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see NetLink NBN Trust earnings per share are up 3.0% per annum over the last five years. With slack earnings growth and paying out substantially more than it reported in profit last year, this dividend is potentially at risk of being cut.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last seven years, NetLink NBN Trust has lifted its dividend by approximately 2.3% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Has NetLink NBN Trust got what it takes to maintain its dividend payments? NetLink NBN Trust is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not that we think NetLink NBN Trust is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

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 NetLink NBN Trust. Case in point: We've spotted 1 warning sign for NetLink NBN Trust you should be aware of.

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.