Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Intershop Holding AG (VTX:ISN) is about to trade ex-dividend in the next 3 days. Investors can purchase shares before the 6th of April in order to be eligible for this dividend, which will be paid on the 8th of April.

Intershop Holding's next dividend payment will be CHF25.00 per share, and in the last 12 months, the company paid a total of CHF25.00 per share. Looking at the last 12 months of distributions, Intershop Holding has a trailing yield of approximately 5.1% on its current stock price of CHF495. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Intershop Holding can afford its dividend, and if the dividend could grow.

See our latest analysis for Intershop Holding

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Intershop Holding paid out more than half (67%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the past year it paid out 115% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Intershop Holding 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 Intershop Holding to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Intershop Holding 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. This is why it's a relief to see Intershop Holding earnings per share are up 4.1% per annum over the last five years. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Intershop Holding has delivered 2.3% dividend growth per year on average over the past ten years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Intershop Holding? Intershop Holding is paying out a reasonable percentage of its income and an uncomfortably high 115% of its cash flow as dividends. At least earnings per share have been growing steadily. It's not that we think Intershop Holding is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

With that being said, if you're still considering Intershop Holding as an investment, you'll find it beneficial to know what risks this stock is facing. Be aware that Intershop Holding is showing 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.