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Read This Before Considering BHP Group Limited (ASX:BHP) For Its Upcoming US$0.90 Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see BHP Group Limited (ASX:BHP) is about to trade ex-dividend in the next 4 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 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 BHP Group's shares before the 9th of March in order to be eligible for the dividend, which will be paid on the 30th of March.

The company's next dividend payment will be US$0.90 per share, and in the last 12 months, the company paid a total of US$3.25 per share. Last year's total dividend payments show that BHP Group has a trailing yield of 9.9% on the current share price of A$48.32. 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 check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for BHP Group

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. BHP Group is paying out an acceptable 74% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether BHP Group generated enough free cash flow to afford its dividend. It paid out 85% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

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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.

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historic-dividend

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see BHP Group's earnings have been skyrocketing, up 25% per annum for the past five years.

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, BHP Group has lifted its dividend by approximately 11% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

Final Takeaway

Should investors buy BHP Group for the upcoming dividend? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see BHP Group's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 74% and 85% respectively. All things considered, we are not particularly enthused about BHP Group from a dividend perspective.

While it's tempting to invest in BHP Group for the dividends alone, you should always be mindful of the risks involved. We've identified 2 warning signs with BHP Group (at least 1 which is concerning), and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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