Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Microchip Technology Incorporated (NASDAQ:MCHP) is about to trade ex-dividend in the next 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. Accordingly, Microchip Technology investors that purchase the stock on or after the 21st of November will not receive the dividend, which will be paid on the 6th of December.

The company’s upcoming dividend is US$0.44 a share, following on from the last 12 months, when the company distributed a total of US$1.76 per share to shareholders. Calculating the last year’s worth of payments shows that Microchip Technology has a trailing yield of 2.1% on the current share price of $82.5. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Microchip Technology can afford its dividend, and if the dividend could grow.

View our latest analysis for Microchip Technology

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. That’s why it’s good to see Microchip Technology paying out a modest 32% of its 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. Fortunately, it paid out only 26% of its free cash flow in the past year.

It’s positive to see that Microchip Technology’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That’s why it’s comforting to see Microchip Technology’s earnings have been skyrocketing, up 53% per annum for the past five years. Microchip Technology is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Microchip Technology has lifted its dividend by approximately 9.5% a year on average. We’re glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Should investors buy Microchip Technology for the upcoming dividend? Microchip Technology has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Microchip Technology looks solid on this analysis overall, and we’d definitely consider investigating it more closely.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Every company has risks, and we’ve spotted 2 warning signs for Microchip Technology (of which 1 shouldn’t be ignored!) you should know about.

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.

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.