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Should You Buy The Colonial Motor Company Limited (NZSE:CMO) For Its Upcoming Dividend?

It looks like The Colonial Motor Company Limited (NZSE:CMO) is about to go ex-dividend in the next four days. You will need to purchase shares before the 24th of September to receive the dividend, which will be paid on the 5th of October.

The upcoming dividend for Colonial Motor will put a total of NZ$0.38 per share in shareholders' pockets, up from last year's total dividends of NZ$0.32. 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! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Colonial Motor

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. Fortunately Colonial Motor's payout ratio is modest, at just 48% of profit. A useful secondary check can be to evaluate whether Colonial Motor generated enough free cash flow to afford its dividend. The good news is it paid out just 15% of its free cash flow in the last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

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historic-dividend

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're encouraged by the steady growth at Colonial Motor, with earnings per share up 4.4% on average over the last five years. Recent earnings growth has been limited. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Colonial Motor has delivered an average of 7.9% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Colonial Motor worth buying for its dividend? Earnings per share have been growing moderately, and Colonial Motor is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Colonial Motor is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Colonial Motor, and we would prioritise taking a closer look at it.

So while Colonial Motor looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. To help with this, we've discovered 2 warning signs for Colonial Motor that you should be aware of before investing in their shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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. 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.

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