Don't Race Out To Buy StepStone Group LP (NASDAQ:STEP) Just Because It's Going Ex-Dividend

StepStone Group LP (NASDAQ:STEP) stock is about to trade ex-dividend in four 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. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase StepStone Group's shares before the 14th of June in order to be eligible for the dividend, which will be paid on the 28th of June.

The company's next dividend payment will be US$0.36 per share, and in the last 12 months, the company paid a total of US$0.84 per share. Calculating the last year's worth of payments shows that StepStone Group has a trailing yield of 2.0% on the current share price of US$41.45. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for StepStone Group

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. StepStone Group paid out 91% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances.

Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. StepStone Group's earnings per share have fallen at approximately 25% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last three years, StepStone Group has lifted its dividend by approximately 44% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. StepStone Group is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid StepStone Group? Not only are earnings per share shrinking, but StepStone Group is paying out a disconcertingly high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

So if you're still interested in StepStone Group despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 3 warning signs for StepStone Group (of which 1 is a bit concerning!) you should know about.

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.