Readers hoping to buy Sonata Software Limited (NSE:SONATSOFTW) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 7th of November to receive the dividend, which will be paid on the 29th of November.

Sonata Software's upcoming dividend is ₹5.8 a share, following on from the last 12 months, when the company distributed a total of ₹12.8 per share to shareholders. Looking at the last 12 months of distributions, Sonata Software has a trailing yield of approximately 4.1% on its current stock price of ₹311.5. If you buy this business for its dividend, you should have an idea of whether Sonata Software's dividend is reliable and sustainable. So we need to investigate whether Sonata Software can afford its dividend, and if the dividend could grow.

See our latest analysis for Sonata Software

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. Sonata Software is paying out an acceptable 53% of its profit, a common payout level among most companies. 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. Over the last year, it paid out more than three-quarters (78%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

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 Sonata Software has grown its earnings rapidly, up 28% a year for the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, Sonata Software has lifted its dividend by approximately 38% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

Final Takeaway

Is Sonata Software worth buying for its dividend? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. That's why we're glad to see Sonata Software's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 53% and 78% respectively. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

Wondering what the future holds for Sonata Software? See what the four analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.