It looks like Hennessy Advisors, Inc. (NASDAQ:HNNA) is about to go ex-dividend in the next 3 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Hennessy Advisors' shares on or after the 14th of November, you won't be eligible to receive the dividend, when it is paid on the 27th of November.

The company's next dividend payment will be US$0.1375 per share. Last year, in total, the company distributed US$0.55 to shareholders. Last year's total dividend payments show that Hennessy Advisors has a trailing yield of 5.4% on the current share price of US$10.20. If you buy this business for its dividend, you should have an idea of whether Hennessy Advisors's dividend is reliable and sustainable. So we need to investigate whether Hennessy Advisors can afford its dividend, and if the dividend could grow.

View our latest analysis for Hennessy Advisors

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. Hennessy Advisors paid out more than half (69%) of its earnings last year, which is a regular payout ratio for most companies.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

Click here to see how much of its profit Hennessy Advisors paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Hennessy Advisors's 21% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Hennessy Advisors has delivered an average of 18% per year annual increase in its dividend, based on the past 10 years of dividend payments. Growing the dividend payout ratio while earnings are declining can deliver nice returns for a while, but it's always worth checking for when the company can't increase the payout ratio any more - because then the music stops.

The Bottom Line

From a dividend perspective, should investors buy or avoid Hennessy Advisors? Earnings per share have been declining and the company is paying out more than half its profits to shareholders; not an enticing combination. Hennessy Advisors doesn't appear to have a lot going for it, and we're not inclined to take a risk on owning it for the dividend.

With that being said, if you're still considering Hennessy Advisors as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Hennessy Advisors is showing 3 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.