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Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Diversified Energy Company PLC (LON:DEC) is about to trade ex-dividend in the next 2 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Therefore, if you purchase Diversified Energy's shares on or after the 27th of February, you won't be eligible to receive the dividend, when it is paid on the 31st of March.
The company's next dividend payment will be US$0.29 per share, and in the last 12 months, the company paid a total of US$1.16 per share. Based on the last year's worth of payments, Diversified Energy stock has a trailing yield of around 8.3% on the current share price of UK£11.13. 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.
View our latest analysis for Diversified Energy
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Diversified Energy is paying out an acceptable 58% of its profit, a common payout level among most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Over the last year, it paid out more than three-quarters (87%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.
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 the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. 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 Diversified Energy's 23% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.