Is GTN Limited (ASX:GTN) a good dividend stock? How can we tell? Dividend paying companies with growing earnings can be highly rewarding in the long term. Yet sometimes, investors buy a stock for its dividend and lose money because the share price falls by more than they earned in dividend payments.

GTN pays a 8.5% dividend yield, and has been paying dividends for the past three years. It's certainly an attractive yield, but readers are likely curious about its staying power. During the year, the company also conducted a buyback equivalent to around 0.6% of its market capitalisation. Some simple analysis can reduce the risk of holding GTN for its dividend, and we'll focus on the most important aspects below.

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Payout ratios

Companies (usually) pay dividends out of their earnings. If a company is paying more than it earns, the dividend might have to be cut. So we need to form a view on if a company's dividend is sustainable, relative to its net profit after tax. In the last year, GTN paid out 80% of its profit as dividends. It's paying out most of its earnings, which limits the amount that can be reinvested in the business. This may indicate limited need for further capital within the business, or highlight a commitment to paying a dividend.

Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend. With a cash payout ratio of 102%, GTN's dividend payments are poorly covered by cash flow. While GTN's dividends were covered by the company's reported profits, free cash flow is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to GTN's ability to maintain its dividend.

We update our data on GTN every 24 hours, so you can always get our latest analysis of its financial health, here.

Dividend Volatility

From the perspective of an income investor who wants to earn dividends for many years, there is not much point buying a stock if its dividend is regularly cut or is not reliable. This company's dividend has been unstable, and with a relatively short history, we think it's a little soon to draw strong conclusions about its long term dividend potential. During the past three-year period, the first annual payment was AU$0.11 in 2016, compared to AU$0.064 last year. This works out to a decline of approximately 43% over that time.