Read This Before Considering Richardson Electronics, Ltd. (NASDAQ:RELL) For Its Upcoming US$0.06 Dividend

Richardson Electronics, Ltd. (NASDAQ:RELL) is about to trade ex-dividend in the next 4 days. You will need to purchase shares before the 4th of May to receive the dividend, which will be paid on the 26th of May.

Richardson Electronics's next dividend payment will be US$0.06 per share, on the back of last year when the company paid a total of US$0.24 to shareholders. Last year's total dividend payments show that Richardson Electronics has a trailing yield of 3.0% on the current share price of $7.99. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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 Richardson Electronics

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. Richardson Electronics paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If Richardson Electronics didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the last year it paid out 54% of its free cash flow as dividends, within the usual range for most companies.

Click here to see how much of its profit Richardson Electronics paid out over the last 12 months.

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Richardson Electronics was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Richardson Electronics has delivered 12% dividend growth per year on average over the past 10 years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Get our latest analysis on Richardson Electronics's balance sheet health here.

Final Takeaway

Should investors buy Richardson Electronics for the upcoming dividend? It's hard to get used to Richardson Electronics paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. All things considered, we are not particularly enthused about Richardson Electronics from a dividend perspective.

If you're not too concerned about Richardson Electronics's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, we've found 1 warning sign for Richardson Electronics that we recommend you consider before investing in the business.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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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. 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.
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