Downer EDI Limited (ASX:DOW) is about to trade ex-dividend in the next four days. Typically, the ex-dividend date is two business days before the record date, which is the date on which a company determines the shareholders eligible to receive a 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 Downer EDI's shares before the 3rd of September in order to be eligible for the dividend, which will be paid on the 2nd of October.

The company's next dividend payment will be AU$0.141 per share, on the back of last year when the company paid a total of AU$0.25 to shareholders. Based on the last year's worth of payments, Downer EDI stock has a trailing yield of around 3.4% on the current share price of AU$7.23. If you buy this business for its dividend, you should have an idea of whether Downer EDI's dividend is reliable and sustainable. As a result, readers should always check whether Downer EDI has been able to grow its dividends, or if the dividend might be cut.

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If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Downer EDI distributed an unsustainably high 134% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Fortunately, it paid out only 36% of its free cash flow in the past year.

It's good to see that while Downer EDI's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

View our latest analysis for Downer EDI

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.ASX:DOW Historic Dividend August 29th 2025

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Downer EDI's flat earnings over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

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Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Downer EDI's dividend payments are effectively flat on where they were 10 years ago.

Final Takeaway

Has Downer EDI got what it takes to maintain its dividend payments? Along with flat earnings per share, Downer EDI paid out an uncomfortably high percentage of its earnings. It paid out a lower percentage of its free cash flow. It's not that we think Downer EDI is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that in mind though, if the poor dividend characteristics of Downer EDI don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 2 warning signs for Downer EDI you should know about.

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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.

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