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It looks like Nesco Limited (NSE:NESCO) is about to go ex-dividend in the next 3 days. You will need to purchase shares before the 26th of July to receive the dividend, which will be paid on the 4th of September.

Nesco's next dividend payment will be ₹2.50 per share, and in the last 12 months, the company paid a total of ₹2.50 per share. Looking at the last 12 months of distributions, Nesco has a trailing yield of approximately 0.5% on its current stock price of ₹552.4. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.

View our latest analysis for Nesco

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. Nesco paid out just 9.8% of its profit last year, which we think is conservatively low and leaves plenty of margin for unexpected circumstances. 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 77% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's positive to see that Nesco'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 how much of its profit Nesco paid out over the last 12 months.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see Nesco's earnings per share have risen 17% per annum over the last five years. It paid out more than three-quarters of its earnings in the last year, even though earnings per share are growing rapidly. Higher earnings generally bode well for growing dividends, although with seemingly strong growth prospects we'd wonder why management are not reinvesting more in the business.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Nesco has lifted its dividend by approximately 35% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

To Sum It Up

From a dividend perspective, should investors buy or avoid Nesco? Earnings per share have grown at a nice rate in recent times and over the last year, Nesco paid out less than half its earnings and a bit over half its free cash flow. There's a lot to like about Nesco, and we would prioritise taking a closer look at it.

Keen to explore more data on Nesco's financial performance? Check out our visualisation of its historical revenue and earnings growth.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.