Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Jumbo Interactive Limited (ASX:JIN) is about to trade ex-dividend in the next 3 days. If you purchase the stock on or after the 5th of March, you won't be eligible to receive this dividend, when it is paid on the 20th of March.

Jumbo Interactive's upcoming dividend is AU$0.18 a share, following on from the last 12 months, when the company distributed a total of AU$0.48 per share to shareholders. Last year's total dividend payments show that Jumbo Interactive has a trailing yield of 4.3% on the current share price of A$11.05. If you buy this business for its dividend, you should have an idea of whether Jumbo Interactive's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Jumbo Interactive

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. It paid out 88% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether Jumbo Interactive generated enough free cash flow to afford its dividend. The company paid out 98% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.

Jumbo Interactive paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were Jumbo Interactive to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

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

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Jumbo Interactive has grown its earnings rapidly, up 44% a year for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past ten years, Jumbo Interactive has increased its dividend at approximately 37% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

From a dividend perspective, should investors buy or avoid Jumbo Interactive? It's good to see that earnings per share are growing and that the company's payout ratio is within a normal range for most businesses. However we're somewhat concerned that it paid out 98% of its cashflow, which is uncomfortably high. In summary, while it has some positive characteristics, we're not inclined to race out and buy Jumbo Interactive today.

Wondering what the future holds for Jumbo Interactive? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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