Here's Why We're Wary Of Buying Compass Diversified's (NYSE:CODI) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Compass Diversified (NYSE:CODI) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 14th of January to receive the dividend, which will be paid on the 22nd of January.

Compass Diversified's next dividend payment will be US$0.36 per share, on the back of last year when the company paid a total of US$1.44 to shareholders. Based on the last year's worth of payments, Compass Diversified has a trailing yield of 6.9% on the current stock price of $20.75. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Compass Diversified can afford its dividend, and if the dividend could grow.

See our latest analysis for Compass Diversified

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. Compass Diversified lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Compass Diversified reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.

We'd also point out that Compass Diversified issued a meaningful number of new shares in the past year. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Compass Diversified has lifted its dividend by approximately 0.6% a year on average.

We update our analysis on Compass Diversified every 24 hours, so you can always get the latest insights on its financial health, here.

Final Takeaway

Is Compass Diversified an attractive dividend stock, or better left on the shelf? It's hard to get past the idea of Compass Diversified paying a dividend despite reporting a loss over the past year - especially when the general trend in its earnings also looks to be negative. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

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 Compass Diversified. Our analysis shows 3 warning signs for Compass Diversified that we strongly recommend you have a look at before investing in the company.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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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