Is It Smart To Buy Discover Financial Services (NYSE:DFS) Before It Goes Ex-Dividend?

It looks like Discover Financial Services (NYSE:DFS) is about to go ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 19th of February will not receive this dividend, which will be paid on the 5th of March.

Discover Financial Services’s upcoming dividend is US$0.44 a share, following on from the last 12 months, when the company distributed a total of US$1.76 per share to shareholders. Looking at the last 12 months of distributions, Discover Financial Services has a trailing yield of approximately 2.3% on its current stock price of $76.2. 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! That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for Discover Financial Services

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. Discover Financial Services has a low and conservative payout ratio of just 18% of its income after tax.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

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

NYSE:DFS Historical Dividend Yield, February 14th 2020
NYSE:DFS Historical Dividend Yield, February 14th 2020

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Discover Financial Services’s earnings per share have been growing at 13% a year for the past five years.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, Discover Financial Services has lifted its dividend by approximately 36% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

From a dividend perspective, should investors buy or avoid Discover Financial Services? Typically, companies that are growing rapidly and paying out a low fraction of earnings are keeping the profits for reinvestment in the business. This strategy can add significant value to shareholders over the long term – as long as it’s done without issuing too many new shares. Discover Financial Services ticks a lot of boxes for us from a dividend perspective, and we think these characteristics should mark the company as deserving of further attention.

Curious what other investors think of Discover Financial Services? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

If you’re in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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