Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Adairs Limited (ASX:ADH) is about to go ex-dividend in just 4 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a 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. In other words, investors can purchase Adairs' shares before the 10th of March in order to be eligible for the dividend, which will be paid on the 3rd of April.

The company's next dividend payment will be AU$0.065 per share. Last year, in total, the company distributed AU$0.14 to shareholders. Last year's total dividend payments show that Adairs has a trailing yield of 6.1% on the current share price of AU$2.28. If you buy this business for its dividend, you should have an idea of whether Adairs's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Adairs

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. Adairs paid out 72% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Adairs generated enough free cash flow to afford its dividend. Fortunately, it paid out only 27% of its free cash flow in the past year.

It's positive to see that Adairs's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that Adairs's earnings are effectively flat over the past five years. Better than seeing them fall off a cliff, for sure, but the best dividend stocks grow their earnings meaningfully over the long run. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Adairs has delivered an average of 3.8% per year annual increase in its dividend, based on the past nine years of dividend payments.

The Bottom Line

Has Adairs got what it takes to maintain its dividend payments? It's unfortunate that earnings per share have not grown, and we'd note that Adairs is paying out lower percentage of its cashflow than its profit, but overall the dividend looks well covered by earnings. Overall, it's hard to get excited about Adairs from a dividend perspective.

In light of that, while Adairs has an appealing dividend, it's worth knowing the risks involved with this stock. For example, we've found 1 warning sign for Adairs that we recommend you consider before investing in the business.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.