Dividend paying stocks like Flight Centre Travel Group Limited (ASX:FLT) tend to be popular with investors, and for good reason - some research suggests a significant amount of all stock market returns come from reinvested dividends. Yet sometimes, investors buy a popular dividend stock because of its yield, and then lose money if the company's dividend doesn't live up to expectations.

With Flight Centre Travel Group yielding 3.3% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income. When buying stocks for their dividends, you should always run through the checks below, to see if the dividend looks sustainable.

Explore this interactive chart for our latest analysis on Flight Centre Travel Group!

Payout ratios

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. Looking at the data, we can see that 60% of Flight Centre Travel Group's profits were paid out as dividends in the last 12 months. A payout ratio above 50% generally implies a business is reaching maturity, although it is still possible to reinvest in the business or increase the dividend over time.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. Flight Centre Travel Group paid out 95% of its free cash flow last year, suggesting the dividend is poorly covered by cash flow. Flight Centre Travel Group paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Flight Centre Travel Group's ability to maintain its dividend.

While the above analysis focuses on dividends relative to a company's earnings, we do note Flight Centre Travel Group's strong net cash position, which will let it pay larger dividends for a time, should it choose.

Consider getting our latest analysis on Flight Centre Travel Group's financial position here.

Dividend Volatility

One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well - nasty. For the purpose of this article, we only scrutinise the last decade of Flight Centre Travel Group's dividend payments. The dividend has been cut by more than 20% on at least one occasion historically. During the past ten-year period, the first annual payment was AU$0.57 in 2009, compared to AU$1.58 last year. Dividends per share have grown at approximately 11% per year over this time. Flight Centre Travel Group's dividend payments have fluctuated, so it hasn't grown 11% every year, but the CAGR is a useful rule of thumb for approximating the historical growth.