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 Washington H. Soul Pattinson and Company Limited (ASX:SOL) is about to go ex-dividend in just 4 days. This means that investors who purchase shares on or after the 15th of November will not receive the dividend, which will be paid on the 9th of December.
Washington H. Soul Pattinson's upcoming dividend is AU$0.3 a share, following on from the last 12 months, when the company distributed a total of AU$0.6 per share to shareholders. Last year's total dividend payments show that Washington H. Soul Pattinson has a trailing yield of 2.5% on the current share price of A$23.09. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
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. Washington H. Soul Pattinson is paying out an acceptable 56% of its profit, a common payout level among most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 80% 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.
It's positive to see that Washington H. Soul Pattinson's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
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. Fortunately for readers, Washington H. Soul Pattinson's earnings per share have been growing at 13% a year for the past five years. The company paid out most of its earnings as dividends over the last year, even though business is booming and earnings per share are growing rapidly. We're surprised that management has not elected to reinvest more in the business to accelerate growth further.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last ten years, Washington H. Soul Pattinson has lifted its dividend by approximately 6.5% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
The Bottom Line
Is Washington H. Soul Pattinson an attractive dividend stock, or better left on the shelf? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Washington H. Soul Pattinson's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 56% and 80% respectively. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.
Ever wonder what the future holds for Washington H. Soul Pattinson? See what the two 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.
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If you spot an error that warrants correction, please contact the editor at email@example.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.