Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that United Electronics Company (TADAWUL:4003) is about to go ex-dividend in just 3 days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase United Electronics' shares before the 11th of August in order to receive the dividend, which the company will pay on the 20th of August.

The company's next dividend payment will be ر.س2.00 per share. Last year, in total, the company distributed ر.س6.00 to shareholders. Based on the last year's worth of payments, United Electronics stock has a trailing yield of around 8.8% on the current share price of ر.س67.90. 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.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. It paid out 75% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. 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 dividends equivalent to 410% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how United Electronics intends to continue funding this dividend, or if it could be forced to cut the payment.

While United Electronics'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. Were this to happen repeatedly, this would be a risk to United Electronics's ability to maintain its dividend.

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, United Electronics's earnings per share have been growing at 13% a year for the past five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last nine years, United Electronics has lifted its dividend by approximately 24% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

Final Takeaway

Should investors buy United Electronics for the upcoming dividend? The best dividend stocks typically boast a long history of growing earnings per share (EPS) via a combination of earnings growth and buybacks. So, you might think that United Electronics buying back stock, growing its EPS, and retaining profits within its business is a good combination. However, we note with some concern that it paid out 410% of its free cash flow last year, which is uncomfortably high and makes us wonder why the company chose to spend even more cash on buybacks. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

So if you want to do more digging on United Electronics, you'll find it worthwhile knowing the risks that this stock faces.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.