Analog Devices (NASDAQ:ADI) Could Be A Buy For Its Upcoming Dividend

Readers hoping to buy Analog Devices, Inc. (NASDAQ:ADI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Analog Devices' shares before the 2nd of June to receive the dividend, which will be paid on the 14th of June.

The company's upcoming dividend is US$0.86 a share, following on from the last 12 months, when the company distributed a total of US$3.44 per share to shareholders. Based on the last year's worth of payments, Analog Devices stock has a trailing yield of around 1.9% on the current share price of $176.53. If you buy this business for its dividend, you should have an idea of whether Analog Devices's dividend is reliable and sustainable. So we need to investigate whether Analog Devices can afford its dividend, and if the dividend could grow.

View our latest analysis for Analog Devices

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Analog Devices paid out a comfortable 46% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 41% of its free cash flow as dividends, a comfortable payout level for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Analog Devices has grown its earnings rapidly, up 26% a year for the past five years. Analog Devices is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

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, Analog Devices has lifted its dividend by approximately 11% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

Should investors buy Analog Devices for the upcoming dividend? Analog Devices has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Analog Devices looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

On that note, you'll want to research what risks Analog Devices is facing. Our analysis shows 1 warning sign for Analog Devices and you should be aware of this before buying any shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.