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Broadcom Inc. (NASDAQ:AVGO) is about to trade ex-dividend in the next three days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the 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 Broadcom's shares on or after the 21st of September, you won't be eligible to receive the dividend, when it is paid on the 30th of September.
The company's next dividend payment will be US$4.10 per share. Last year, in total, the company distributed US$16.40 to shareholders. Looking at the last 12 months of distributions, Broadcom has a trailing yield of approximately 3.3% on its current stock price of $502.5. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
View our latest analysis for Broadcom
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Broadcom paid out 68% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Broadcom generated enough free cash flow to afford its dividend. Fortunately, it paid out only 45% of its free cash flow in the past 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 the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see Broadcom earnings per share are up 3.3% per annum over the last five years. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.
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, Broadcom has increased its dividend at approximately 42% a year on average. 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.