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 Solution Dynamics Limited (NZSE:SDL) is about to go ex-dividend in just 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Solution Dynamics' shares before the 15th of September in order to receive the dividend, which the company will pay on the 30th of September.
The company's next dividend payment will be NZ$0.04 per share. Last year, in total, the company distributed NZ$0.13 to shareholders. Calculating the last year's worth of payments shows that Solution Dynamics has a trailing yield of 5.2% on the current share price of NZ$2.52. 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 Solution Dynamics can afford its dividend, and if the dividend could grow.
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. Solution Dynamics paid out 74% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Solution Dynamics generated enough free cash flow to afford its dividend. It paid out more than half (67%) of its free cash flow in the past year, which is within an average range for most companies.
It's positive to see that Solution Dynamics'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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Solution Dynamics's earnings per share have been growing at 13% a year for the past five years. Solution Dynamics is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Solution Dynamics has delivered an average of 36% per year annual increase in its dividend, based on the past seven years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
From a dividend perspective, should investors buy or avoid Solution Dynamics? 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 Solution Dynamics's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 74% and 67% respectively. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Solution Dynamics's dividend merits.
On that note, you'll want to research what risks Solution Dynamics is facing. In terms of investment risks, we've identified 2 warning signs with Solution Dynamics and understanding them should be part of your investment process.
A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here