Capital Appreciation Limited (JSE:CTA) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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 Capital Appreciation's shares on or after the 3rd of January, you won't be eligible to receive the dividend, when it is paid on the 8th of January.

The company's next dividend payment will be R0.043 per share, and in the last 12 months, the company paid a total of R0.083 per share. Looking at the last 12 months of distributions, Capital Appreciation has a trailing yield of approximately 6.3% on its current stock price of ZAR1.31. If you buy this business for its dividend, you should have an idea of whether Capital Appreciation's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Capital Appreciation

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 77% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline.

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 Capital Appreciation paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Capital Appreciation, with earnings per share up 2.1% on average over the last five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, six years ago, Capital Appreciation has lifted its dividend by approximately 13% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.