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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 NACCO Industries, Inc. (NYSE:NC) is about to trade ex-dividend in the next four 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. In other words, investors can purchase NACCO Industries' shares before the 29th of November in order to be eligible for the dividend, which will be paid on the 15th of December.
The company's upcoming dividend is US$0.20 a share, following on from the last 12 months, when the company distributed a total of US$0.79 per share to shareholders. Based on the last year's worth of payments, NACCO Industries stock has a trailing yield of around 2.6% on the current share price of $30.63. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether NACCO Industries has been able to grow its dividends, or if the dividend might be cut.
View our latest analysis for NACCO Industries
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. NACCO Industries paid out just 16% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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. It paid out an unsustainably high 226% of its free cash flow as dividends over the past 12 months, which is worrying. It's pretty hard to pay out more than you earn, so we wonder how NACCO Industries intends to continue funding this dividend, or if it could be forced to cut the payment.
NACCO Industries does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.
While NACCO Industries's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were NACCO Industries to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.