Don't Race Out To Buy Selangor Dredging Berhad (KLSE:SDRED) Just Because It's Going Ex-Dividend

Selangor Dredging Berhad (KLSE:SDRED) stock is about to trade ex-dividend in 3 days. 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. In other words, investors can purchase Selangor Dredging Berhad's shares before the 1st of October in order to be eligible for the dividend, which will be paid on the 14th of October.

The company's upcoming dividend is RM00.03 a share, following on from the last 12 months, when the company distributed a total of RM0.03 per share to shareholders. Based on the last year's worth of payments, Selangor Dredging Berhad has a trailing yield of 6.5% on the current stock price of RM00.46. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

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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. Selangor Dredging Berhad lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. What's good is that dividends were well covered by free cash flow, with the company paying out 12% of its cash flow last year.

See our latest analysis for Selangor Dredging Berhad

Click here to see how much of its profit Selangor Dredging Berhad paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Selangor Dredging Berhad was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Selangor Dredging Berhad has increased its dividend at approximately 1.8% a year on average.

Remember, you can always get a snapshot of Selangor Dredging Berhad's financial health, by checking our visualisation of its financial health, here.

To Sum It Up

From a dividend perspective, should investors buy or avoid Selangor Dredging Berhad? It's hard to get used to Selangor Dredging Berhad paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

With that in mind though, if the poor dividend characteristics of Selangor Dredging Berhad don't faze you, it's worth being mindful of the risks involved with this business. To that end, you should learn about the 3 warning signs we've spotted with Selangor Dredging Berhad (including 1 which makes us a bit uncomfortable).

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.