NZME Limited (NZSE:NZM) is about to trade ex-dividend in the next 4 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, NZME investors that purchase the stock on or after the 18th of March will not receive the dividend, which will be paid on the 31st of March.

The company's next dividend payment will be NZ$0.0705882 per share, and in the last 12 months, the company paid a total of NZ$0.09 per share. Based on the last year's worth of payments, NZME stock has a trailing yield of around 7.6% on the current share price of NZ$1.19. If you buy this business for its dividend, you should have an idea of whether NZME's dividend is reliable and sustainable. So we need to investigate whether NZME can afford its dividend, and if the dividend could grow.

View our latest analysis for NZME

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. NZME's dividend is not well covered by earnings, as the company lost money last year. This is not a sustainable state of affairs, so it would be worth investigating if earnings are expected to recover. Considering the lack of profitability, we also need to check if the company generated enough cash flow to cover the dividend payment. If NZME didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Dividends consumed 67% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. NZME was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. NZME has delivered 2.8% dividend growth per year on average over the past nine years. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

We update our analysis on NZME every 24 hours, so you can always get the latest insights on its financial health, here.

The Bottom Line

From a dividend perspective, should investors buy or avoid NZME? We're a bit uncomfortable with it paying a dividend while being loss-making. However, we note that the dividend was covered by cash flow. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

If you're not too concerned about NZME's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, we've found 1 warning sign for NZME that we recommend you consider before investing in the business.

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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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.