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Dividend Investors: Don't Be Too Quick To Buy Argo Investments Limited (ASX:ARG) For Its Upcoming Dividend

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Argo Investments Limited (ASX:ARG) stock is about to trade ex-dividend in four days. You can purchase shares before the 19th of February in order to receive the dividend, which the company will pay on the 12th of March.

Argo Investments's upcoming dividend is AU$0.14 a share, following on from the last 12 months, when the company distributed a total of AU$0.30 per share to shareholders. Based on the last year's worth of payments, Argo Investments stock has a trailing yield of around 3.4% on the current share price of A$8.91. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Argo Investments has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Argo Investments

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. Argo Investments distributed an unsustainably high 136% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious.

When a company pays out a dividend that is not well covered by profits, the dividend is generally seen as more vulnerable to being cut.

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

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Argo Investments's earnings per share have fallen at approximately 9.8% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Argo Investments has increased its dividend at approximately 1.8% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid Argo Investments? Not only are earnings per share shrinking, but Argo Investments is paying out a disconcertingly high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

With that being said, if you're still considering Argo Investments as an investment, you'll find it beneficial to know what risks this stock is facing. For example, Argo Investments has 2 warning signs (and 1 which is concerning) we think you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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.

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