It looks like Richardson Electronics, Ltd. (NASDAQ:RELL) is about to go ex-dividend in the next 2 days. Investors can purchase shares before the 4th of February in order to be eligible for this dividend, which will be paid on the 24th of February.

Richardson Electronics's next dividend payment will be US$0.06 per share, on the back of last year when the company paid a total of US$0.24 to shareholders. Last year's total dividend payments show that Richardson Electronics has a trailing yield of 3.8% on the current share price of $6.38. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to investigate whether Richardson Electronics can afford its dividend, and if the dividend could grow.

See our latest analysis for Richardson Electronics

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Richardson Electronics lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Richardson Electronics didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. Over the past year it paid out 142% of its free cash flow as dividends, which is uncomfortably high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Richardson Electronics does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Click here to see how much of its profit Richardson Electronics paid out over the last 12 months.

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 earnings fall far enough, the company could be forced to cut its dividend. Richardson Electronics was unprofitable last year, but at least the general trend suggests its earnings have been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.