Don't Race Out To Buy Yield Microelectronics Corp. (TWSE:6423) Just Because It's Going Ex-Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Yield Microelectronics Corp. (TWSE:6423) is about to trade ex-dividend in the next 3 days. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Yield Microelectronics' shares on or after the 13th of March will not receive the dividend, which will be paid on the 15th of April.

The company's next dividend payment will be NT$0.99 per share, and in the last 12 months, the company paid a total of NT$1.00 per share. Based on the last year's worth of payments, Yield Microelectronics stock has a trailing yield of around 1.0% on the current share price of NT$96.20. 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.

Check out our latest analysis for Yield Microelectronics

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Yield Microelectronics paid out 95% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Yield Microelectronics generated enough free cash flow to afford its dividend. The company paid out 110% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Companies usually need cash more than they need earnings - expenses don't pay themselves - so it's not great to see it paying out so much of its cash flow.

Yield Microelectronics does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Cash is slightly more important than profit from a dividend perspective, but given Yield Microelectronics's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

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. This is why it's a relief to see Yield Microelectronics earnings per share are up 2.8% per annum over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Yield Microelectronics is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

Yield Microelectronics also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Yield Microelectronics's dividend payments are broadly unchanged compared to where they were three years ago.

Final Takeaway

Is Yield Microelectronics an attractive dividend stock, or better left on the shelf? The dividends are not well covered by either income or free cash flow, although at least earnings per share are slowly increasing. Bottom line: Yield Microelectronics has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

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 Yield Microelectronics. In terms of investment risks, we've identified 2 warning signs with Yield Microelectronics and understanding them should be part of your investment process.

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.