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Don't Buy Domain Holdings Australia Limited (ASX:DHG) For Its Next Dividend Without Doing These Checks

Simply Wall St

Readers hoping to buy Domain Holdings Australia Limited (ASX:DHG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 22nd of August will not receive the dividend, which will be paid on the 10th of September.

Domain Holdings Australia's next dividend payment will be AU$0.04 per share. Last year, in total, the company distributed AU$0.06 to shareholders. Based on the last year's worth of payments, Domain Holdings Australia has a trailing yield of 2.0% on the current stock price of A$2.93. 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 Domain Holdings Australia has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Domain Holdings Australia

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Domain Holdings Australia's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If Domain Holdings Australia 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. Dividends consumed 65% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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

ASX:DHG Historical Dividend Yield, August 18th 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Domain Holdings Australia was unprofitable last year, and sadly its loss per share worsened by 850% on the previous year.

Given that Domain Holdings Australia has only been paying a dividend for a year, there's not much of a past history to draw insight from.

We update our analysis on Domain Holdings Australia every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Is Domain Holdings Australia worth buying for its dividend? It's hard to get used to Domain Holdings Australia paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Ever wonder what the future holds for Domain Holdings Australia? See what the eight analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

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.