Don't Buy Capital One Financial Corporation (NYSE:COF) For Its Next Dividend Without Doing These Checks

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Capital One Financial Corporation (NYSE:COF) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, Capital One Financial investors that purchase the stock on or after the 17th of November will not receive the dividend, which will be paid on the 1st of December.

The company's upcoming dividend is US$0.80 a share, following on from the last 12 months, when the company distributed a total of US$2.40 per share to shareholders. Last year's total dividend payments show that Capital One Financial has a trailing yield of 1.1% on the current share price of US$220.75. 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.

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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. Last year Capital One Financial paid out 100% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings.

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

Check out our latest analysis for Capital One Financial

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 earnings fall far enough, the company could be forced to cut its dividend. Capital One Financial's earnings per share have plummeted approximately 30% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Capital One Financial has lifted its dividend by approximately 7.2% 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. Capital One Financial 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.

Final Takeaway

Is Capital One Financial an attractive dividend stock, or better left on the shelf? Not only are earnings per share shrinking, but Capital One Financial 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. Capital One Financial doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the 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 Capital One Financial. For example, Capital One Financial has 2 warning signs (and 1 which makes us a bit uncomfortable) we think 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.