Readers hoping to buy Think Childcare Limited (ASX:TNK) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 5th of September will not receive this dividend, which will be paid on the 20th of September.

Think Childcare's upcoming dividend is AU$0.02 a share, following on from the last 12 months, when the company distributed a total of AU$0.04 per share to shareholders. Based on the last year's worth of payments, Think Childcare has a trailing yield of 3.1% on the current stock price of A$1.3. If you buy this business for its dividend, you should have an idea of whether Think Childcare's dividend is reliable and sustainable. So we need to investigate whether Think Childcare can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Think Childcare

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Think Childcare paid out 115% 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 flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Think Childcare paid out more free cash flow than it generated - 128%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Cash is slightly more important than profit from a dividend perspective, but given Think Childcare's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

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

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. 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 Think Childcare has grown its earnings rapidly, up 30% a year for the past five years. Think Childcare's dividend was not well covered by earnings, although at least its earnings per share are growing quickly. Fast-growing businesses normally need to reinvest most of their earnings in order to maintain growth, so we'd suspect that either earnings growth will slow or the dividend may not be increased for a while.