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Don't Buy Richardson Electronics, Ltd. (NASDAQ:RELL) For Its Next Dividend Without Doing These Checks

Simply Wall St

Readers hoping to buy Richardson Electronics, Ltd. (NASDAQ:RELL) 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 6th of August will not receive the dividend, which will be paid on the 23rd of August.

Richardson Electronics's upcoming dividend is US$0.06 a share, following on from the last 12 months, when the company distributed a total of US$0.24 per share to shareholders. Looking at the last 12 months of distributions, Richardson Electronics has a trailing yield of approximately 4.2% on its current stock price of $5.65. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Richardson Electronics has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Richardson Electronics

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Richardson Electronics reported a loss after tax last year, which means it's paying a dividend despite being unprofitable. While this might be a one-off event, this is unlikely to be sustainable in the long term. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. 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.

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

NasdaqGS:RELL Historical Dividend Yield, August 2nd 2019

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. 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. In the last 10 years, Richardson Electronics has lifted its dividend by approximately 12% a year on average. 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

Is Richardson Electronics an attractive dividend stock, or better left on the shelf? First, it's not great to see the company paying a dividend despite being loss-making over the last year. Second, the dividend was not well covered by cash flow. Bottom line: Richardson Electronics has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Keen to explore more data on Richardson Electronics's financial performance? Check out our visualisation of its historical revenue and earnings growth.

If you're in the market for dividend stocks, we recommend checking our list of top 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.