Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Financial Institutions, Inc. (NASDAQ:FISI) is about to trade ex-dividend in the next 2 days. Typically, the ex-dividend date is one business day 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 as the process of settlement involves a full business day. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase Financial Institutions' shares on or after the 14th of March will not receive the dividend, which will be paid on the 2nd of April.

The company's upcoming dividend is US$0.31 a share, following on from the last 12 months, when the company distributed a total of US$1.20 per share to shareholders. Looking at the last 12 months of distributions, Financial Institutions has a trailing yield of approximately 4.8% on its current stock price of US$25.94. If you buy this business for its dividend, you should have an idea of whether Financial Institutions's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Financial Institutions

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. Financial Institutions reported a loss last year, so it's not great to see that it has continued paying a dividend. Financial Institutions paid a dividend despite reporting negative free cash flow over the last twelve months. This may be due to heavy investment in the business, but this is still suboptimal from a dividend sustainability perspective.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. Financial Institutions was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Financial Institutions has delivered 5.0% dividend growth per year on average over the past 10 years.

Get our latest analysis on Financial Institutions's balance sheet health here.

To Sum It Up

Should investors buy Financial Institutions for the upcoming dividend? It's hard to get past the idea of Financial Institutions paying a dividend despite reporting a loss over the past year - especially when the general trend in its earnings also looks to be negative. All things considered, we're not optimistic about its dividend prospects, and would be inclined to leave it on the shelf for now.

With that in mind though, if the poor dividend characteristics of Financial Institutions don't faze you, it's worth being mindful of the risks involved with this business. For example, Financial Institutions has 2 warning signs (and 1 which is concerning) we think you should know about.

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.