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Is It Smart To Buy Hong Kong Exchanges and Clearing Limited (HKG:388) Before It Goes Ex-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 Hong Kong Exchanges and Clearing Limited (HKG:388) is about to go ex-dividend in just 4 days. You can purchase shares before the 27th of August in order to receive the dividend, which the company will pay on the 26th of September.

Hong Kong Exchanges and Clearing's upcoming dividend is HK$3.72 a share, following on from the last 12 months, when the company distributed a total of HK$6.71 per share to shareholders. Based on the last year's worth of payments, Hong Kong Exchanges and Clearing stock has a trailing yield of around 2.7% on the current share price of HK$251.6. 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! As a result, readers should always check whether Hong Kong Exchanges and Clearing has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Hong Kong Exchanges and Clearing

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 89% 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 worried about the risk of a drop in earnings.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

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

SEHK:388 Historical Dividend Yield, August 22nd 2019

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Hong Kong Exchanges and Clearing's earnings per share have risen 14% per annum over the last five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Hong Kong Exchanges and Clearing has delivered an average of 4.6% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

To Sum It Up

From a dividend perspective, should investors buy or avoid Hong Kong Exchanges and Clearing? Earnings per share are growing at an attractive rate, and Hong Kong Exchanges and Clearing is paying out a bit over half its profits. In summary, Hong Kong Exchanges and Clearing appears to have some promise as a dividend stock, and we'd suggest taking a closer look at it.

Ever wonder what the future holds for Hong Kong Exchanges and Clearing? See what the 15 analysts we track 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.