Smartgroup Corporation Ltd (ASX:SIQ) stock is about to trade ex-dividend in 3 days time. If you purchase the stock on or after the 30th of August, you won't be eligible to receive this dividend, when it is paid on the 16th of September.

Smartgroup's next dividend payment will be AU$0.21 per share, on the back of last year when the company paid a total of AU$0.43 to shareholders. Based on the last year's worth of payments, Smartgroup stock has a trailing yield of around 4.0% on the current share price of A$10.86. 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 investigate whether Smartgroup can afford its dividend, and if the dividend could grow.

View our latest analysis for Smartgroup

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. It paid out 90% 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 worried about the risk of a drop in earnings. 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 (69%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's encouraging to see Smartgroup has grown its earnings rapidly, up 66% a year for the past five years. Earnings per share are growing at a rapid rate, yet the company is paying out more than three-quarters of its earnings.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 5 years, Smartgroup has lifted its dividend by approximately 48% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.