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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 Watsco, Inc. (NYSE:WSO) is about to trade ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 14th of January will not receive this dividend, which will be paid on the 29th of January.
Watsco's next dividend payment will be US$1.78 per share. Last year, in total, the company distributed US$7.10 to shareholders. Based on the last year's worth of payments, Watsco has a trailing yield of 2.9% on the current stock price of $242.89. 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! So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for Watsco
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Watsco paid out 99% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It paid out more than half (52%) of its free cash flow in the past year, which is within an average range for most companies.
It's good to see that while Watsco's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Watsco earnings per share are up 9.5% per annum over the last five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Watsco has lifted its dividend by approximately 13% 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.