Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Magyar Bancorp, Inc. (NASDAQ:MGYR) is about to trade ex-dividend in the next 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Magyar Bancorp's shares on or after the 3rd of August will not receive the dividend, which will be paid on the 18th of August.

The upcoming dividend for Magyar Bancorp will put a total of US$0.03 per share in shareholders' pockets. If you buy this business for its dividend, you should have an idea of whether Magyar Bancorp's dividend is reliable and sustainable. So we need to investigate whether Magyar Bancorp can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Magyar Bancorp

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. Magyar Bancorp has a low and conservative payout ratio of just 2.5% of its income after tax.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

Click here to see how much of its profit Magyar Bancorp 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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Magyar Bancorp's earnings have been skyrocketing, up 45% per annum for the past five years.

Magyar Bancorp also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

This is Magyar Bancorp's first year of paying a dividend, which is exciting for shareholders - but it does mean there's no dividend history to examine.

The Bottom Line

From a dividend perspective, should investors buy or avoid Magyar Bancorp? Companies like Magyar Bancorp that are growing rapidly and paying out a low fraction of earnings, are usually reinvesting heavily in their business. This is one of the most attractive investment combinations under this analysis, as it can create substantial value for investors over the long run. In summary, Magyar Bancorp appears to have some promise as a dividend stock, and we'd suggest taking a closer look at it.