Should You Buy Gen Digital Inc. (NASDAQ:GEN) 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 Gen Digital Inc. (NASDAQ:GEN) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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, Gen Digital investors that purchase the stock on or after the 19th of May will not receive the dividend, which will be paid on the 11th of June.

The company's next dividend payment will be US$0.125 per share, on the back of last year when the company paid a total of US$0.50 to shareholders. Based on the last year's worth of payments, Gen Digital stock has a trailing yield of around 1.7% on the current share price of US$28.60. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Gen Digital has been able to grow its dividends, or if the dividend might be cut.

Our free stock report includes 2 warning signs investors should be aware of before investing in Gen Digital. Read for free now.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Gen Digital paid out a comfortable 48% of its profit last year. A useful secondary check can be to evaluate whether Gen Digital generated enough free cash flow to afford its dividend. Fortunately, it paid out only 26% of its free cash flow in the past year.

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.

Check out our latest analysis for Gen Digital

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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Gen Digital earnings per share are up 2.1% per annum over the last five years. Recent earnings growth has been limited. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Gen Digital has seen its dividend decline 1.8% per annum on average over the past 10 years, which is not great to see.

To Sum It Up

From a dividend perspective, should investors buy or avoid Gen Digital? Earnings per share growth has been growing somewhat, and Gen Digital is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Gen Digital is halfway there. Overall we think this is an attractive combination and worthy of further research.

While it's tempting to invest in Gen Digital for the dividends alone, you should always be mindful of the risks involved. For example, we've found 2 warning signs for Gen Digital (1 is concerning!) that deserve your attention before investing in the shares.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.