DCM Shriram (NSE:DCMSHRIRAM) Could Be A Buy For Its Upcoming Dividend

Readers hoping to buy DCM Shriram Limited (NSE:DCMSHRIRAM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date generally occurs two days before the record date, which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, DCM Shriram investors that purchase the stock on or after the 31st of July will not receive the dividend, which will be paid on the 17th of September.

The company's next dividend payment will be ₹4.00 per share, on the back of last year when the company paid a total of ₹11.20 to shareholders. Last year's total dividend payments show that DCM Shriram has a trailing yield of 1.1% on the current share price of ₹1005.80. If you buy this business for its dividend, you should have an idea of whether DCM Shriram's dividend is reliable and sustainable. As a result, readers should always check whether DCM Shriram has been able to grow its dividends, or if the dividend might be cut.

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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. DCM Shriram paid out just 20% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 48% of its free cash flow in the past year.

It's positive to see that DCM Shriram'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.

View our latest analysis for DCM Shriram

Click here to see how much of its profit DCM Shriram paid out over the last 12 months.

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. With that in mind, we're encouraged by the steady growth at DCM Shriram, with earnings per share up 4.3% on average over the last five years. Recent earnings growth has been limited. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, DCM Shriram has lifted its dividend by approximately 21% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Should investors buy DCM Shriram for the upcoming dividend? Earnings per share growth has been growing somewhat, and DCM Shriram is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and DCM Shriram is halfway there. Overall we think this is an attractive combination and worthy of further research.

While it's tempting to invest in DCM Shriram for the dividends alone, you should always be mindful of the risks involved. For example, DCM Shriram has 2 warning signs (and 1 which is potentially serious) we think you should know about.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.