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We Wouldn't Be Too Quick To Buy Starwood Property Trust, Inc. (NYSE:STWD) Before It Goes Ex-Dividend

Simply Wall St

Readers hoping to buy Starwood Property Trust, Inc. (NYSE:STWD) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. This means that investors who purchase shares on or after the 27th of September will not receive the dividend, which will be paid on the 15th of October.

Starwood Property Trust's next dividend payment will be US$0.5 per share. Last year, in total, the company distributed US$1.9 to shareholders. Looking at the last 12 months of distributions, Starwood Property Trust has a trailing yield of approximately 7.7% on its current stock price of $24.79. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Starwood Property Trust

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Starwood Property Trust paid out 142% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance.

Generally, the higher a company's payout ratio, the more the dividend is at risk of being reduced.

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

NYSE:STWD Historical Dividend Yield, September 22nd 2019

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Starwood Property Trust's earnings per share have fallen at approximately 7.0% a year over the previous 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 ten years, Starwood Property Trust has lifted its dividend by approximately 17% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Starwood Property Trust is already paying out 142% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Is Starwood Property Trust an attractive dividend stock, or better left on the shelf? Earnings per share are in decline and Starwood Property Trust is paying out what we feel is an uncomfortably high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

Wondering what the future holds for Starwood Property Trust? See what the seven analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.