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Here's Why We're Wary Of Buying Chicago Rivet & Machine's (NYSEMKT:CVR) For Its Upcoming Dividend

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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Chicago Rivet & Machine Co. (NYSEMKT:CVR) is about to trade ex-dividend in the next four days. You will need to purchase shares before the 3rd of December to receive the dividend, which will be paid on the 18th of December.

Chicago Rivet & Machine's next dividend payment will be US$0.10 per share, on the back of last year when the company paid a total of US$0.40 to shareholders. Looking at the last 12 months of distributions, Chicago Rivet & Machine has a trailing yield of approximately 1.9% on its current stock price of $21.2435. If you buy this business for its dividend, you should have an idea of whether Chicago Rivet & Machine's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Chicago Rivet & Machine

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. Chicago Rivet & Machine 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 cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It paid out 77% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

Click here to see how much of its profit Chicago Rivet & Machine paid out over the last 12 months.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Chicago Rivet & Machine was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Chicago Rivet & Machine's dividend payments are effectively flat on where they were 10 years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

We update our analysis on Chicago Rivet & Machine every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

Is Chicago Rivet & Machine worth buying for its dividend? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Bottom line: Chicago Rivet & Machine has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Chicago Rivet & Machine. Every company has risks, and we've spotted 3 warning signs for Chicago Rivet & Machine (of which 1 makes us a bit uncomfortable!) 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@simplywallst.com.