Here's Why We're Wary Of Buying Qualitas' (ASX:QAL) For Its Upcoming Dividend

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 Qualitas Limited (ASX:QAL) is about to go ex-dividend in just 4 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Meaning, you will need to purchase Qualitas' shares before the 7th of March to receive the dividend, which will be paid on the 28th of March.

The company's next dividend payment will be AU$0.0225 per share. Last year, in total, the company distributed AU$0.077 to shareholders. Calculating the last year's worth of payments shows that Qualitas has a trailing yield of 2.9% on the current share price of AU$2.65. If you buy this business for its dividend, you should have an idea of whether Qualitas's dividend is reliable and sustainable. As a result, readers should always check whether Qualitas has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Qualitas

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Qualitas paid out 93% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances.

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.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Qualitas's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 74% a year over the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last two years, Qualitas has lifted its dividend by approximately 39% a year on average. 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. Qualitas is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

To Sum It Up

Is Qualitas worth buying for its dividend? Earnings per share are in decline and Qualitas is paying out what we feel is an uncomfortably high percentage of its profit as dividends. It's not that we hate the business, but we feel that these characeristics are not desirable for investors seeking a reliable dividend stock to own for the long term. These characteristics don't generally lead to outstanding dividend performance, and investors may not be happy with the results of owning this stock for its dividend.

With that in mind though, if the poor dividend characteristics of Qualitas don't faze you, it's worth being mindful of the risks involved with this business. Case in point: We've spotted 1 warning sign for Qualitas you should be aware of.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.