It Might Be Better To Avoid Domain Holdings Australia Limited's (ASX:DHG) Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Domain Holdings Australia Limited (ASX:DHG) is about to trade ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 26th of February will not receive the dividend, which will be paid on the 13th of March.

Domain Holdings Australia's next dividend payment will be AU$0.02 per share. Last year, in total, the company distributed AU$0.06 to shareholders. Last year's total dividend payments show that Domain Holdings Australia has a trailing yield of 1.7% on the current share price of A$3.6. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Domain Holdings Australia

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. Last year, Domain Holdings Australia paid out 92% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. The company paid out 101% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

As Domain Holdings Australia's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

ASX:DHG Historical Dividend Yield, February 22nd 2020
ASX:DHG Historical Dividend Yield, February 22nd 2020

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Domain Holdings Australia's dividend payments per share have declined at 13% per year on average over the past two years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Is Domain Holdings Australia an attractive dividend stock, or better left on the shelf? Not only are earnings per share declining, but Domain Holdings Australia is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a clearly suboptimal combination that usually suggests the dividend is at risk of being cut. If not now, then perhaps in the future. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

Curious what other investors think of Domain Holdings Australia? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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