Know This Before Buying Daktronics, Inc. (NASDAQ:DAKT) For Its Dividend

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Today we'll take a closer look at Daktronics, Inc. (NASDAQ:DAKT) from a dividend investor's perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on the income from dividends, it's important to be a lot more stringent with your investments than the average punter.

In this case, Daktronics likely looks attractive to dividend investors, given its 3.2% dividend yield and nine-year payment history. It sure looks interesting on these metrics - but there's always more to the story . There are a few simple ways to reduce the risks of buying Daktronics for its dividend, and we'll go through these below.

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Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. As a result, we should always investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax. Although it reported a loss over the past 12 months, Daktronics currently pays a dividend. When a company is loss-making, we next need to check to see if its cash flows can support the dividend.

With a cash payout ratio of 102%, Daktronics's dividend payments are poorly covered by cash flow.

We update our data on Daktronics every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. Looking at the last decade of data, we can see that Daktronics paid its first dividend at least nine years ago. It's good to see that Daktronics has been paying a dividend for a number of years. However, the dividend has been cut at least once in the past, and we're concerned that what has been cut once, could be cut again. During the past nine-year period, the first annual payment was US$0.10 in 2010, compared to US$0.20 last year. This works out to be a compound annual growth rate (CAGR) of approximately 8.0% a year over that time. The growth in dividends has not been linear, but the CAGR is a decent approximation of the rate of change over this time frame.

A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

Dividend Growth Potential

Given that the dividend has been cut in the past, we need to check if earnings are growing and if that might lead to stronger dividends in the future. It's not great to see that Daktronics's have fallen at approximately 37% over the past five years. Declining earnings per share over a number of years is not a great sign for the dividend investor. Without some improvement, this does not bode well for the long term value of a company's dividend.

Conclusion

When we look at a dividend stock, we need to form a judgement on whether the dividend will grow, if the company is able to maintain it in a wide range of economic circumstances, and if the dividend payout is sustainable. Daktronics's dividend is not well covered by free cash flow, plus it paid a dividend while being unprofitable. Second, earnings per share have been in decline, and its dividend has been cut at least once in the past. Using these criteria, Daktronics looks quite suboptimal from a dividend investment perspective.

Are management backing themselves to deliver performance? Check their shareholdings in Daktronics in our latest insider ownership analysis.

Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.