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 Cincinnati Financial Corporation (NASDAQ:CINF) is about to go ex-dividend in just 4 days. Ex-dividend means that investors that purchase the stock on or after the 17th of March will not receive this dividend, which will be paid on the 15th of April.
Cincinnati Financial's next dividend payment will be US$0.60 per share, on the back of last year when the company paid a total of US$2.40 to shareholders. Calculating the last year's worth of payments shows that Cincinnati Financial has a trailing yield of 2.7% on the current share price of $89.99. 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.
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. Cincinnati Financial is paying out just 18% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events.
Generally speaking, the lower a company's payout ratios, the more resilient its dividend usually is.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Cincinnati Financial's earnings have been skyrocketing, up 31% per annum for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Cincinnati Financial has delivered an average of 4.4% per year annual increase in its dividend, based on the past ten years of dividend payments. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.
From a dividend perspective, should investors buy or avoid Cincinnati Financial? Typically, companies that are growing rapidly and paying out a low fraction of earnings are keeping the profits for reinvestment in the business. Perhaps even more importantly - this can sometimes signal management is focused on the long term future of the business. Overall, Cincinnati Financial looks like a promising dividend stock in this analysis, and we think it would be worth investigating further.
While it's tempting to invest in Cincinnati Financial for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 2 warning signs for Cincinnati Financial (of which 1 can't be ignored!) you should know about.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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