Praemium Limited (ASX:PPS) is about to trade ex-dividend in the next three days. The ex-dividend date is usually set to be two business days before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, Praemium investors that purchase the stock on or after the 6th of March will not receive the dividend, which will be paid on the 21st of March.

The company's next dividend payment will be AU$0.01 per share. 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 investigate whether Praemium can afford its dividend, and if the dividend could grow.

View our latest analysis for Praemium

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Praemium paid out a comfortable 46% of its profit last year. A useful secondary check can be to evaluate whether Praemium generated enough free cash flow to afford its dividend. It paid out more than half (64%) 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.

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 Praemium has grown its earnings rapidly, up 28% a year for the past five years.

This is Praemium's first year of paying a regular dividend, so it doesn't have much of a history yet to compare to.

To Sum It Up

Is Praemium an attractive dividend stock, or better left on the shelf? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. Praemium looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

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

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.

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