Readers hoping to buy NetApp, Inc. (NASDAQ:NTAP) 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 7th of January will not receive this dividend, which will be paid on the 27th of January.

NetApp's upcoming dividend is US$0.48 a share, following on from the last 12 months, when the company distributed a total of US$1.92 per share to shareholders. Based on the last year's worth of payments, NetApp has a trailing yield of 2.9% on the current stock price of $66.24. 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 NetApp

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. NetApp is paying out an acceptable 62% 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. Thankfully its dividend payments took up just 40% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that NetApp'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?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, NetApp's earnings per share have been growing at 12% a year for the past five years. NetApp is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. NetApp has delivered 16% dividend growth per year on average over the past eight years. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.