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

Simply Wall St

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 Chicago Rivet & Machine Co. (NYSEMKT:CVR) is about to go ex-dividend in just 4 days. You will need to purchase shares before the 4th of March to receive the dividend, which will be paid on the 20th of March.

Chicago Rivet & Machine's next dividend payment will be US$0.22 per share. Last year, in total, the company distributed US$1.18 to shareholders. Looking at the last 12 months of distributions, Chicago Rivet & Machine has a trailing yield of approximately 4.9% on its current stock price of $24.1425. If you buy this business for its dividend, you should have an idea of whether Chicago Rivet & Machine's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Chicago Rivet & Machine

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. Chicago Rivet & Machine paid out more than half (74%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out 108% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

Chicago Rivet & Machine does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Chicago Rivet & Machine paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Chicago Rivet & Machine's ability to maintain its dividend.

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

AMEX:CVR Historical Dividend Yield, February 28th 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Chicago Rivet & Machine's earnings per share have fallen at approximately 14% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last ten years, Chicago Rivet & Machine has lifted its dividend by approximately 11% a year on average. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

Final Takeaway

Is Chicago Rivet & Machine an attractive dividend stock, or better left on the shelf? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Chicago Rivet & Machine.

Want to learn more about Chicago Rivet & Machine's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

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.

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.

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. Thank you for reading.