Readers hoping to buy Valhi, Inc. (NYSE:VHI) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Valhi's shares before the 29th of November in order to be eligible for the dividend, which will be paid on the 19th of December.

The company's next dividend payment will be US$0.08 per share. Last year, in total, the company distributed US$0.32 to shareholders. Last year's total dividend payments show that Valhi has a trailing yield of 1.2% on the current share price of US$26.71. If you buy this business for its dividend, you should have an idea of whether Valhi's dividend is reliable and sustainable. So we need to investigate whether Valhi can afford its dividend, and if the dividend could grow.

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. Valhi is paying out just 10% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Luckily it paid out just 23% of its free cash flow last year.

It's positive to see that Valhi'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.

Click here to see how much of its profit Valhi paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Valhi's 17% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Valhi's dividend payments per share have declined at 18% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

To Sum It Up

Should investors buy Valhi for the upcoming dividend? Valhi has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Valhi's dividend merits.

In light of that, while Valhi has an appealing dividend, it's worth knowing the risks involved with this stock. To that end, you should learn about the 3 warning signs we've spotted with Valhi (including 1 which is significant).

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.