Readers hoping to buy The Procter & Gamble Company (NYSE:PG) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Investors can purchase shares before the 22nd of April in order to be eligible for this dividend, which will be paid on the 17th of May.

Procter & Gamble's upcoming dividend is US$0.87 a share, following on from the last 12 months, when the company distributed a total of US$3.16 per share to shareholders. Calculating the last year's worth of payments shows that Procter & Gamble has a trailing yield of 2.5% on the current share price of $137.25. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Procter & Gamble has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Procter & Gamble

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Procter & Gamble paid out 57% of its earnings to investors last year, a normal payout level for most businesses. 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. It distributed 49% of its free cash flow as dividends, a comfortable payout level for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, Procter & Gamble's earnings per share have been growing at 13% a year for the past five years. Procter & Gamble has an average payout ratio which suggests a balance between growing earnings and rewarding shareholders. This is a reasonable combination that could hint at some further dividend increases in the future.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Procter & Gamble has delivered an average of 6.1% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy Procter & Gamble for the upcoming dividend? We like Procter & Gamble's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. It's a promising combination that should mark this company worthy of closer attention.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Our analysis shows 2 warning signs for Procter & Gamble and you should be aware of them before buying any shares.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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