Readers hoping to buy carsales.com Ltd (ASX:CAR) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 22nd of September, you won’t be eligible to receive this dividend, when it is paid on the 7th of October.

carsales.com’s next dividend payment will be AU$0.25 per share, and in the last 12 months, the company paid a total of AU$0.47 per share. Calculating the last year’s worth of payments shows that carsales.com has a trailing yield of 2.3% on the current share price of A$20.49. If you buy this business for its dividend, you should have an idea of whether carsales.com’s dividend is reliable and sustainable. As a result, readers should always check whether carsales.com has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for carsales.com

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. Last year carsales.com paid out 96% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. 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 74% of its free cash flow as dividends, within the usual range for most companies.

It’s good to see that while carsales.com’s dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we’re encouraged by the steady growth at carsales.com, with earnings per share up 2.5% on average over the last five years.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, carsales.com has increased its dividend at approximately 14% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is carsales.com worth buying for its dividend? Earnings per share have not grown all that much, and the company is paying out an uncomfortably high percentage of its income. Fortunately it paid out a lower percentage of its cash flow. With the way things are shaping up from a dividend perspective, we’d be inclined to steer clear of carsales.com.

Although, if you’re still interested in carsales.com and want to know more, you’ll find it very useful to know what risks this stock faces. To help with this, we’ve discovered 2 warning signs for carsales.com that you should be aware of before investing in their shares.

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.

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