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It Might Not Be A Great Idea To Buy Chicago Rivet & Machine Co. (NYSEMKT:CVR) For Its Next 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. This means that investors who purchase shares on or after the 4th of September will not receive the dividend, which will be paid on the 20th of September.

Chicago Rivet & Machine's next dividend payment will be US$0.22 per share, and in the last 12 months, the company paid a total of US$1.18 per share. Looking at the last 12 months of distributions, Chicago Rivet & Machine has a trailing yield of approximately 4.3% on its current stock price of $27.75. 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! That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Chicago Rivet & Machine

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. It paid out 75% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. 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's positive to see that Chicago Rivet & Machine'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.

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

AMEX:CVR Historical Dividend Yield, August 30th 2019

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Readers will understand then, why we're concerned to see Chicago Rivet & Machine's earnings per share have dropped 15% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Chicago Rivet & Machine has lifted its dividend by approximately 5.1% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

To Sum It Up

Is Chicago Rivet & Machine an attractive dividend stock, or better left on the shelf? Chicago Rivet & Machine had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. 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.

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.