Readers hoping to buy Singapore Technologies Engineering Ltd (SGX:S63) 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 important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. 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 5th of September.

The company's upcoming dividend is S$0.04 a share, following on from the last 12 months, when the company distributed a total of S$0.16 per share to shareholders. Last year's total dividend payments show that Singapore Technologies Engineering has a trailing yield of 3.5% on the current share price of S$4.56. If you buy this business for its dividend, you should have an idea of whether Singapore Technologies Engineering's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

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. It paid out 78% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 73% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Singapore Technologies Engineering, with earnings per share up 5.4% on average over the last five years. Decent historical earnings per share growth suggests Singapore Technologies Engineering has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Singapore Technologies Engineering has delivered an average of 0.6% per year annual increase in its dividend, based on the past 10 years of dividend payments.

The Bottom Line

Is Singapore Technologies Engineering an attractive dividend stock, or better left on the shelf? Earnings per share have been growing modestly and Singapore Technologies Engineering paid out a bit over half of its earnings and free cash flow last year. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

However if you're still interested in Singapore Technologies Engineering as a potential investment, you should definitely consider some of the risks involved with Singapore Technologies Engineering. For example, we've found 2 warning signs for Singapore Technologies Engineering (1 is a bit unpleasant!) that deserve your attention before investing in the shares.

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