Here's Why We're Wary Of Buying Golden Resources Development International's (HKG:677) For Its Upcoming Dividend

Golden Resources Development International Limited (HKG:677) is about to trade ex-dividend in the next 4 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Golden Resources Development International's shares before the 31st of August to receive the dividend, which will be paid on the 18th of September.

The company's next dividend payment will be HK$0.012 per share, on the back of last year when the company paid a total of HK$0.023 to shareholders. Based on the last year's worth of payments, Golden Resources Development International has a trailing yield of 6.4% on the current stock price of HK$0.36. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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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. Golden Resources Development International distributed an unsustainably high 143% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Golden Resources Development International generated enough free cash flow to afford its dividend. The good news is it paid out just 17% of its free cash flow in the last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Golden Resources Development International fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

View our latest analysis for Golden Resources Development International

Click here to see how much of its profit Golden Resources Development International paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by Golden Resources Development International's 7.7% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. It looks like the Golden Resources Development International dividends are largely the same as they were 10 years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

Final Takeaway

Is Golden Resources Development International worth buying for its dividend? It's never great to see earnings per share declining, especially when a company is paying out 143% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Golden Resources Development International.

So if you're still interested in Golden Resources Development International despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. We've identified 3 warning signs with Golden Resources Development International (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.