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 Severn Bancorp, Inc. (NASDAQ:SVBI) is about to go ex-dividend in just 4 days. You can purchase shares before the 4th of September in order to receive the dividend, which the company will pay on the 15th of September.
Severn Bancorp's next dividend payment will be US$0.04 per share. Last year, in total, the company distributed US$0.16 to shareholders. Last year's total dividend payments show that Severn Bancorp has a trailing yield of 2.6% on the current share price of $6.14. 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 investigate whether Severn Bancorp can afford its dividend, and if the dividend could grow.
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That's why it's good to see Severn Bancorp paying out a modest 35% of its earnings.
When a company paid out less in dividends than it earned in profit, this generally suggests its dividend is affordable. The lower the % of its profit that it pays out, the greater the margin of safety for the dividend if the business enters a downturn.
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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Severn Bancorp has grown its earnings rapidly, up 52% a year for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Severn Bancorp has delivered an average of 2.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. Earnings per share have been growing much quicker than dividends, potentially because Severn Bancorp is keeping back more of its profits to grow the business.
To Sum It Up
From a dividend perspective, should investors buy or avoid Severn Bancorp? Typically, companies that are growing rapidly and paying out a low fraction of earnings are keeping the profits for reinvestment in the business. This is one of the most attractive investment combinations under this analysis, as it can create substantial value for investors over the long run. Overall, Severn Bancorp looks like a promising dividend stock in this analysis, and we think it would be worth investigating further.
So while Severn Bancorp looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example - Severn Bancorp has 3 warning signs we think you should be aware of.
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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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