Do These 3 Checks Before Buying Greatek Electronics Inc. (TWSE:2441) For Its Upcoming Dividend

Greatek Electronics Inc. (TWSE:2441) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a 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. Therefore, if you purchase Greatek Electronics' shares on or after the 27th of August, you won't be eligible to receive the dividend, when it is paid on the 27th of September.

The company's next dividend payment will be NT$2.50 per share, on the back of last year when the company paid a total of NT$2.50 to shareholders. Looking at the last 12 months of distributions, Greatek Electronics has a trailing yield of approximately 4.0% on its current stock price of NT$62.50. 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! As a result, readers should always check whether Greatek Electronics has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Greatek Electronics

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Greatek Electronics is paying out an acceptable 62% of its profit, a common payout level among most companies. 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 61% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Greatek Electronics'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.

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Greatek Electronics's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Greatek Electronics has increased its dividend at approximately 4.6% a year on average.

To Sum It Up

Is Greatek Electronics worth buying for its dividend? While earnings per share are flat, at least Greatek Electronics has not committed itself to an unsustainable dividend, with its earnings and cashflow payout ratios within reasonable bounds. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

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 Greatek Electronics. Case in point: We've spotted 1 warning sign for Greatek Electronics you should be aware of.

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.