PCTEL, Inc. (NASDAQ:PCTI) is about to trade ex-dividend in the next three days. You can purchase shares before the 5th of February in order to receive the dividend, which the company will pay on the 15th of February.

PCTEL's upcoming dividend is US$0.055 a share, following on from the last 12 months, when the company distributed a total of US$0.22 per share to shareholders. Looking at the last 12 months of distributions, PCTEL has a trailing yield of approximately 3.0% on its current stock price of $7.36. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

See our latest analysis for PCTEL

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. PCTEL distributed an unsustainably high 119% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 42% of the free cash flow it generated, which is a comfortable payout ratio.

It's good to see that while PCTEL's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by PCTEL's 6.2% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last nine years, PCTEL has lifted its dividend by approximately 7.0% a year on average. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. PCTEL is already paying out 119% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.