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 Exchange Income Corporation (TSE:EIF) is about to go ex-dividend in just four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn’t show on the record date. Accordingly, Exchange Income investors that purchase the stock on or after the 29th of July will not receive the dividend, which will be paid on the 13th of August.
The company’s next dividend payment will be CA$0.19 per share, and in the last 12 months, the company paid a total of CA$2.28 per share. Based on the last year’s worth of payments, Exchange Income stock has a trailing yield of around 5.6% on the current share price of CA$40.74. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it’s growing.
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. Exchange Income distributed an unsustainably high 199% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Exchange Income generated enough free cash flow to afford its dividend. Over the last year it paid out 61% of its free cash flow as dividends, within the usual range for most companies.
It’s good to see that while Exchange Income’s dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
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. Readers will understand then, why we’re concerned to see Exchange Income’s earnings per share have dropped 6.8% a year over the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, Exchange Income has increased its…
Go to the news source: Here’s Why We’re Wary Of Buying Exchange Income’s (TSE:EIF) For Its Upcoming Div…