Only Three Days Left To Cash In On International Business Machines' (NYSE:IBM) Dividend

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 International Business Machines Corporation (NYSE:IBM) is about to go ex-dividend in just 3 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. 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. Accordingly, International Business Machines investors that purchase the stock on or after the 9th of August will not receive the dividend, which will be paid on the 10th of September.

The company's upcoming dividend is US$1.67 a share, following on from the last 12 months, when the company distributed a total of US$6.68 per share to shareholders. Looking at the last 12 months of distributions, International Business Machines has a trailing yield of approximately 3.5% on its current stock price of US$189.12. 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.

View our latest analysis for International Business Machines

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. International Business Machines is paying out an acceptable 73% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether International Business Machines generated enough free cash flow to afford its dividend. It paid out more than half (50%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that International Business Machines's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're not enthused to see that International Business Machines's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. International Business Machines has delivered 5.8% dividend growth per year on average over the past 10 years.

The Bottom Line

Has International Business Machines got what it takes to maintain its dividend payments? International Business Machines has been unable to generate earnings growth, but at least its dividend looks sustainable, with its profit and cashflow payout ratios within reasonable limits. It's not that we think International Business Machines is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of International Business Machines don't faze you, it's worth being mindful of the risks involved with this business. Our analysis shows 1 warning sign for International Business Machines 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.

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