Microchip Technology Incorporated (NASDAQ:MCHP) is about to trade ex-dividend in the next four days. Investors can purchase shares before the 19th of February in order to be eligible for this dividend, which will be paid on the 8th of March.

Microchip Technology's next dividend payment will be US$0.39 per share, and in the last 12 months, the company paid a total of US$1.56 per share. Calculating the last year's worth of payments shows that Microchip Technology has a trailing yield of 1.0% on the current share price of $159.55. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for Microchip Technology

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Microchip Technology paid out 111% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 21% of its free cash flow as dividends last year, which is conservatively low.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Microchip Technology fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings fall far enough, the company could be forced to cut its dividend. Readers will understand then, why we're concerned to see Microchip Technology's earnings per share have dropped 6.3% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Microchip Technology has lifted its dividend by approximately 1.3% a year on average.