Singapore Technologies Engineering Ltd (SGX:S63) is about to trade ex-dividend in the next four 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. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Singapore Technologies Engineering's shares before the 22nd of August in order to be eligible for the dividend, which will be paid on the 2nd of September.

The company's next dividend payment will be S$0.04 per share. Last year, in total, the company distributed S$0.16 to shareholders. Calculating the last year's worth of payments shows that Singapore Technologies Engineering has a trailing yield of 4.1% on the current share price of SGD3.95. 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 Singapore Technologies Engineering can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Singapore Technologies Engineering

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year Singapore Technologies Engineering paid out 101% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. A useful secondary check can be to evaluate whether Singapore Technologies Engineering generated enough free cash flow to afford its dividend. It paid out an unsustainably high 234% of its free cash flow as dividends over the past 12 months, which is worrying. Our definition of free cash flow excludes cash generated from asset sales, so since Singapore Technologies Engineering is paying out such a high percentage of its cash flow, it might be worth seeing if it sold assets or had similar events that might have led to such a high dividend payment.

As Singapore Technologies Engineering's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

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. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Singapore Technologies Engineering, with earnings per share up 2.7% on average over the last five years. Minimal earnings growth, combined with concerningly high payout ratios suggests that Singapore Technologies Engineering is unlikely to grow the dividend much in future, and indeed the payment could be vulnerable to a cut.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Singapore Technologies Engineering's dividend payments are effectively flat on where they were 10 years ago.

The Bottom Line

From a dividend perspective, should investors buy or avoid Singapore Technologies Engineering? Singapore Technologies Engineering is paying out an uncomfortably high percentage of both earnings and cash flow as dividends, although at least earnings per share are growing somewhat. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.

So if you're still interested in Singapore Technologies Engineering despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example - Singapore Technologies Engineering has 2 warning signs we think you should be aware of.

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.

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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.