Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see American Express Company (NYSE:AXP) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 2nd of April, you won't be eligible to receive this dividend, when it is paid on the 8th of May.
American Express's upcoming dividend is US$0.43 a share, following on from the last 12 months, when the company distributed a total of US$1.72 per share to shareholders. Looking at the last 12 months of distributions, American Express has a trailing yield of approximately 1.9% on its current stock price of $88.73. 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.
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. American Express is paying out just 20% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events.
Generally speaking, the lower a company's payout ratios, the more resilient its dividend usually is.
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 fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at American Express, with earnings per share up 7.5% on average over the last five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. American Express has delivered an average of 9.1% per year annual increase in its dividend, based on the past ten years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
Has American Express got what it takes to maintain its dividend payments? American Express has seen its earnings per share grow slowly in recent years, and the company reinvests more than half of its profits in the business, which generally bodes well for its future prospects. American Express ticks a lot of boxes for us from a dividend perspective, and we think these characteristics should mark the company as deserving of further attention.
While it's tempting to invest in American Express for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 2 warning signs with American Express and understanding them should be part of your investment process.
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.
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