Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Dusk Group Limited (ASX:DSK) is about to trade ex-dividend in the next 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Dusk Group's shares before the 9th of September in order to receive the dividend, which the company will pay on the 24th of September.

The company's next dividend payment will be AU$0.10 per share. Last year, in total, the company distributed AU$0.20 to shareholders. Last year's total dividend payments show that Dusk Group has a trailing yield of 6.1% on the current share price of A$3.29. 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 Dusk Group

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Dusk Group is paying out an acceptable 71% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Dusk Group generated enough free cash flow to afford its dividend. It paid out more than half (61%) of its free cash flow in the past year, which is within an average range for most companies.

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.

 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For that reason, it's encouraging to see Dusk Group's earnings over the past year have risen 114%. While we'd be remiss not to point out that a year is a very short time in dividend investing, it's an encouraging sign so far. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Dusk Group could have strong prospects for future increases to the dividend.

One year is a very short time frame in the pantheon of investing, so we wouldn't get too hung up on these numbers.

Unfortunately Dusk Group has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

Final Takeaway

Should investors buy Dusk 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. However, we'd also note that Dusk Group is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. In summary, while it has some positive characteristics, we're not inclined to race out and buy Dusk Group today.

While it's tempting to invest in Dusk Group for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 2 warning signs for Dusk Group you should know about.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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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