Novatek Microelectronics Corp. (TWSE:3034) Is About To Go Ex-Dividend, And It Pays A 5.2% Yield

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Novatek Microelectronics Corp. (TWSE:3034) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a 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. In other words, investors can purchase Novatek Microelectronics' shares before the 10th of July in order to be eligible for the dividend, which will be paid on the 9th of August.

The company's next dividend payment will be NT$32.00 per share. Last year, in total, the company distributed NT$32.00 to shareholders. Calculating the last year's worth of payments shows that Novatek Microelectronics has a trailing yield of 5.2% on the current share price of NT$620.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Novatek Microelectronics

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. It paid out 83% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be worried about the risk of a drop in earnings. A useful secondary check can be to evaluate whether Novatek Microelectronics generated enough free cash flow to afford its dividend. It paid out 86% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Novatek Microelectronics has grown its earnings rapidly, up 30% a year for the past five years. Earnings per share are growing at a rapid rate, yet the company is paying out more than three-quarters of its earnings.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Novatek Microelectronics has delivered an average of 19% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Has Novatek Microelectronics got what it takes to maintain its dividend payments? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Novatek Microelectronics's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 83% and 86% respectively. All things considered, we are not particularly enthused about Novatek Microelectronics from a dividend perspective.

On that note, you'll want to research what risks Novatek Microelectronics is facing. Case in point: We've spotted 1 warning sign for Novatek Microelectronics 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com