Do Investors Have Good Reason To Be Wary Of WisdomTree Investments, Inc.'s (NASDAQ:WETF) 3.3% Dividend Yield?

Today we'll take a closer look at WisdomTree Investments, Inc. (NASDAQ:WETF) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. Unfortunately, it's common for investors to be enticed in by the seemingly attractive yield, and lose money when the company has to cut its dividend payments.

In this case, WisdomTree Investments likely looks attractive to dividend investors, given its 3.3% dividend yield and six-year payment history. It sure looks interesting on these metrics - but there's always more to the story. During the year, the company also conducted a buyback equivalent to around 5.1% of its market capitalisation. Some simple analysis can offer a lot of insights when buying a company for its dividend, and we'll go through this below.

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Payout ratios

Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. While WisdomTree Investments pays a dividend, it reported a loss over the last year. When a loss-making financial company pays a dividend, the dividend is not being paid out of profit, which is a concern if the company can't return to operating profitably.

Consider getting our latest analysis on WisdomTree Investments' financial position here.

Dividend Volatility

Before buying a stock for its income, we want to see if the dividends have been stable in the past, and if the company has a track record of maintaining its dividend. WisdomTree Investments has been paying a dividend for the past six years. It's good to see that WisdomTree Investments has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past six-year period, the first annual payment was US$0.3 in 2014, compared to US$0.1 last year. The dividend has fallen 63% over that period.

When a company's per-share dividend falls we question if this reflects poorly on either external business conditions, or the company's capital allocation decisions. Either way, we find it hard to get excited about a company with a declining dividend.

Dividend Growth Potential

With a relatively unstable dividend, and a poor history of shrinking dividends, it's even more important to see if EPS are growing. WisdomTree Investments' EPS have fallen by approximately 46% per year during the past five years. With this kind of significant decline, we always wonder what has changed in the business. Dividends are about stability, and WisdomTree Investments' earnings per share, which support the dividend, have been anything but stable.

Conclusion

To summarise, shareholders should always check that WisdomTree Investments' dividends are affordable, that its dividend payments are relatively stable, and that it has decent prospects for growing its earnings and dividend. We're a bit uncomfortable with it paying a dividend while reporting a loss over the past year. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, WisdomTree Investments looks suboptimal from a dividend investment perspective.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 1 warning sign for WisdomTree Investments that investors should know about before committing capital to this stock.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

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This article by Simply Wall St is general in nature. 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.
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