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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 The Coca-Cola Company (NYSE:KO) is about to go ex-dividend in just four 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 as the process of settlement involves 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 Coca-Cola's shares before the 15th of June in order to be eligible for the dividend, which will be paid on the 3rd of July.
The company's upcoming dividend is US$0.46 a share, following on from the last 12 months, when the company distributed a total of US$1.84 per share to shareholders. Calculating the last year's worth of payments shows that Coca-Cola has a trailing yield of 3.0% on the current share price of $60.47. If you buy this business for its dividend, you should have an idea of whether Coca-Cola'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 Coca-Cola
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 78% 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. We'd be concerned if earnings began to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (64%) of its free cash flow in the past year, which is within an average range for most companies.
It's positive to see that Coca-Cola'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?
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. It's encouraging to see Coca-Cola has grown its earnings rapidly, up 51% a year for the past five years. The company is paying out more than three-quarters of its earnings, but it is also generating strong earnings growth.