Looks like Bank of Baroda (NSE:BANKBARODA) is set to go ex-dividend in the next 3 days. The ex-dividend date is one business day before a company’s record date, which is the date the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to know because any purchase of shares made on or after this date may mean late settlement which does not appear on the record date. Therefore, if you buy shares of Bank of Baroda on or after June 17, you will not be eligible to receive the dividend when it is paid on July 27.

The company’s next dividend payment will be ₹2.85 per share, following last year when the company paid a total of ₹2.85 to shareholders. Calculating the value of last year’s payments shows that Bank of Baroda has a yield of 2.7% on the current share price of ₹105.1. Dividends contribute greatly to investment returns for long-term holders, but only if the dividend continues to be paid. That’s why we always have to check if the dividend payouts seem sustainable and if the business is growing.

See our latest analysis for Bank of Baroda

Dividends are usually paid out of company profits. If a company pays more in dividends than it earns in profits, then the dividend could be unsustainable. Bank of Baroda only pays out 19% of its profit after tax, which is comfortably low and leaves plenty of room for adverse events. Bank of Baroda paid a dividend despite negative free cash flow last year. It’s usually a bad combination and – if it was more than once – not sustainable.

Companies that pay less in dividends than they earn in profits generally have longer-lasting dividends. The lower the payout ratio, the more leeway the company has before being forced to cut the dividend.

Click here to see how much of its profits Bank of Baroda has paid out over the past 12 months.

Have earnings and dividends increased?

Companies with consistently rising earnings per share tend to create the best dividend-paying stocks because they generally find it easier to increase dividends per share. If earnings fall enough, the company could be forced to cut its dividend. For this reason, we are pleased to see that Bank of Baroda’s earnings per share have increased by 14% per year over the past five years.

Many investors will gauge a company’s dividend yield by evaluating how much dividend payouts have changed over time. Dividend payouts per Bank of Baroda share have declined by an average of 1.5% per year over the past 10 years, which is uninspiring.

The essential

Should investors buy Bank of Baroda for the upcoming dividend? Typically, companies that grow rapidly and pay out only a small fraction of profits retain profits to reinvest in the business. This is one of the most attractive investment combinations according to this analysis, as it can create substantial value for long-term investors. Overall, Bank of Baroda looks like a promising dividend stock in this analysis, and we think it would be worth investigating further.

Although it is tempting to invest in Bank of Baroda just for the dividends, you should always be aware of the risks involved. We have identified 2 warning signs with Bank of Baroda (at least 1 which should not be ignored), and understanding them should be part of your investment process.

As a general rule, we don’t recommend simply buying the first dividend-paying stock you see. Here is a curated list of attractive stocks that are strong dividend payers.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.