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Why It Might Not Make Sense To Buy Direct Line Insurance Group plc (LON:DLG) For Its Upcoming Dividend

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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 Direct Line Insurance Group plc (LON:DLG) is about to go ex-dividend in just 2 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a 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 Direct Line Insurance Group's shares on or after the 12th of August, you won't be eligible to receive the dividend, when it is paid on the 3rd of September.

The company's upcoming dividend is UK£0.076 a share, following on from the last 12 months, when the company distributed a total of UK£0.22 per share to shareholders. Based on the last year's worth of payments, Direct Line Insurance Group stock has a trailing yield of around 7.3% on the current share price of £3.072. 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! We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Direct Line Insurance Group

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 83% 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. We'd be concerned if earnings began to decline.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Direct Line Insurance Group's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Direct Line Insurance Group has delivered 12% dividend growth per year on average over the past eight years.

To Sum It Up

Should investors buy Direct Line Insurance Group for the upcoming dividend? Direct Line Insurance Group's earnings per share have been essentially flat, and the company is paying out more than half of its earnings as dividends to shareholders. Direct Line Insurance Group doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.

Although, if you're still interested in Direct Line Insurance Group and want to know more, you'll find it very useful to know what risks this stock faces. In terms of investment risks, we've identified 1 warning sign with Direct Line Insurance Group and understanding them should be part of your investment process.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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