Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Vector Capital Plc (LON:VCAP) is about to trade ex-dividend in the next 3 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Vector Capital's shares on or after the 16th of May will not receive the dividend, which will be paid on the 3rd of June.
The company's next dividend payment will be UK£0.0153 per share, on the back of last year when the company paid a total of UK£0.025 to shareholders. Based on the last year's worth of payments, Vector Capital stock has a trailing yield of around 7.8% on the current share price of UK£0.325. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
See our latest analysis for Vector Capital
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Vector Capital is paying out an acceptable 72% of its profit, a common payout level among most companies. Vector Capital paid a dividend despite reporting negative free cash flow last year. That's typically a bad combination and - if this were more than a one-off - not sustainable.
Generally speaking, the lower a company's payout ratios, the more resilient its dividend usually is.
Click here to see how much of its profit Vector Capital paid out over the last 12 months.
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. Readers will understand then, why we're concerned to see Vector Capital's earnings per share have dropped 10% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last three years, Vector Capital has lifted its dividend by approximately 21% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.