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Read This Before Considering Highland Gold Mining Limited (LON:HGM) For Its Upcoming 2.1% Dividend

Simply Wall St

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Highland Gold Mining Limited (LON:HGM) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 12th of September in order to be eligible for this dividend, which will be paid on the 4th of October.

Highland Gold Mining's next dividend payment will be US$0.05 per share. Last year, in total, the company distributed US$0.16 to shareholders. Calculating the last year's worth of payments shows that Highland Gold Mining has a trailing yield of 5.5% on the current share price of £2.396. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Highland Gold Mining

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. Its dividend payout ratio is 82% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We'd be concerned if earnings began to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The company paid out 93% of its free cash flow over the last year, which we think is outside the ideal range 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.

While Highland Gold Mining's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Highland Gold Mining's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

AIM:HGM Historical Dividend Yield, September 8th 2019

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Highland Gold Mining, with earnings per share up 2.6% on average over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Highland Gold Mining has delivered 16% dividend growth per year on average over the past 8 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Highland Gold Mining worth buying for its dividend? Earnings per share have grown somewhat, although Highland Gold Mining paid out over half its profits and the dividend was not well covered by free cash flow. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Curious what other investors think of Highland Gold Mining? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .

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.

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.