It looks like British American Tobacco p.l.c. (LON:BATS) is about to go ex-dividend in the next 4 days. Investors can purchase shares before the 17th of December in order to be eligible for this dividend, which will be paid on the 3rd of February.

British American Tobacco's next dividend payment will be UK£0.53 per share. Last year, in total, the company distributed UK£2.10 to shareholders. Based on the last year's worth of payments, British American Tobacco stock has a trailing yield of around 7.2% on the current share price of £29.17. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for British American Tobacco

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. British American Tobacco paid out 74% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether British American Tobacco generated enough free cash flow to afford its dividend. Fortunately, it paid out only 49% of its free cash flow in the past year.

It's positive to see that British American Tobacco'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?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, British American Tobacco's earnings per share have been growing at 11% a year for the past five years. British American Tobacco has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, British American Tobacco has lifted its dividend by approximately 7.8% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.