Readers hoping to buy Skellerup Holdings Limited (NZSE:SKL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 4th of March, you won't be eligible to receive this dividend, when it is paid on the 18th of March.

Skellerup Holdings's next dividend payment will be NZ$0.071 per share. Last year, in total, the company distributed NZ$0.13 to shareholders. Based on the last year's worth of payments, Skellerup Holdings has a trailing yield of 2.9% on the current stock price of NZ$4.43. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Skellerup Holdings can afford its dividend, and if the dividend could grow.

See our latest analysis for Skellerup Holdings

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. Skellerup Holdings is paying out an acceptable 75% of its profit, a common payout level among most companies. A useful secondary check can be to evaluate whether Skellerup Holdings generated enough free cash flow to afford its dividend. Fortunately, it paid out only 49% of its free cash flow in the past year.

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.

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. For this reason, we're glad to see Skellerup Holdings's earnings per share have risen 10% per annum over the last five years. Skellerup Holdings has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.

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, Skellerup Holdings 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.

To Sum It Up

Is Skellerup Holdings worth buying for its dividend? We like Skellerup Holdings's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. It's a promising combination that should mark this company worthy of closer attention.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Our analysis shows 2 warning signs for Skellerup Holdings and you should be aware of these before buying any shares.

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. 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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