There's A Lot To Like About Steel Dynamics' (NASDAQ:STLD) Upcoming US$0.25 Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Steel Dynamics, Inc. (NASDAQ:STLD) is about to trade ex-dividend in the next four days. If you purchase the stock on or after the 29th of September, you won't be eligible to receive this dividend, when it is paid on the 16th of October.

Steel Dynamics's upcoming dividend is US$0.25 a share, following on from the last 12 months, when the company distributed a total of US$1.00 per share to shareholders. Calculating the last year's worth of payments shows that Steel Dynamics has a trailing yield of 3.4% on the current share price of $29. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Steel Dynamics

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 Steel Dynamics paying out a modest 39% of its earnings. A useful secondary check can be to evaluate whether Steel Dynamics generated enough free cash flow to afford its dividend. Fortunately, it paid out only 29% of its free cash flow in the past year.

It's positive to see that Steel Dynamics'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 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 fall far enough, the company could be forced to cut its dividend. It's encouraging to see Steel Dynamics has grown its earnings rapidly, up 30% a year for the past five years. Steel Dynamics 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. Since the start of our data, 10 years ago, Steel Dynamics has lifted its dividend by approximately 13% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Should investors buy Steel Dynamics for the upcoming dividend? Steel Dynamics 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. Steel Dynamics looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

In light of that, while Steel Dynamics has an appealing dividend, it's worth knowing the risks involved with this stock. For example - Steel Dynamics has 2 warning signs we think you should be aware of.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. 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.

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