April 22, 2024
Investments

It Might Not Be A Great Idea To Buy City of London Investment Group Plc (LON:CLIG) For Its Next Dividend


It looks like City of London Investment Group Plc (LON:CLIG) is about to go ex-dividend in the next three days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company’s books as a shareholder in order to receive the 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. Meaning, you will need to purchase City of London Investment Group’s shares before the 29th of February to receive the dividend, which will be paid on the 28th of March.

The company’s next dividend payment will be UK£0.11 per share. Last year, in total, the company distributed UK£0.33 to shareholders. Last year’s total dividend payments show that City of London Investment Group has a trailing yield of 9.6% on the current share price of UK£3.45. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That’s why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for City of London Investment 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. Last year City of London Investment Group paid out 109% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings.

Generally, the higher a company’s payout ratio, the more the dividend is at risk of being reduced.

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

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Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we’re discomforted by City of London Investment Group’s 5.2% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. City of London Investment Group has delivered 3.2% dividend growth per year on average over the past 10 years. That’s intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. City of London Investment Group is already paying out 109% of its profits, and with shrinking earnings we think it’s unlikely that this dividend will grow quickly in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid City of London Investment Group? Not only are earnings per share shrinking, but City of London Investment Group is paying out a disconcertingly high percentage of its profit as dividends. Generally we think dividend investors should avoid businesses in this situation, as high payout ratios and declining earnings can lead to the dividend being cut. City of London Investment 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.

Having said that, if you’re looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with City of London Investment Group. For example, we’ve found 1 warning sign for City of London Investment Group that we recommend you consider before investing in the business.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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

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.



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