Linc Pen & Plastics Limited (NSE:LINCPENQ) is about to trade ex-dividend in the next 3 days. Ex-dividend means that investors that purchase the stock on or after the 16th of August will not receive this dividend, which will be paid on the 25th of September.

Linc Pen & Plastics's next dividend payment will be ₹1.50 per share. Last year, in total, the company distributed ₹1.50 to shareholders. Calculating the last year's worth of payments shows that Linc Pen & Plastics has a trailing yield of 0.7% on the current share price of ₹215.15. 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 Linc Pen & Plastics has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for Linc Pen & Plastics

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. Fortunately Linc Pen & Plastics's payout ratio is modest, at just 27% of profit. A useful secondary check can be to evaluate whether Linc Pen & Plastics generated enough free cash flow to afford its dividend. Luckily it paid out just 16% of its free cash flow last year.

It's positive to see that Linc Pen & Plastics's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit Linc Pen & Plastics paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Linc Pen & Plastics's 6.8% 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Linc Pen & Plastics's dividend payments are effectively flat on where they were ten years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

The Bottom Line

Should investors buy Linc Pen & Plastics for the upcoming dividend? Earnings per share are down meaningfully, although at least the company is paying out a low and conservative percentage of both its earnings and cash flow. It's definitely not great to see earnings falling, but at least there may be some buffer before the dividend needs to be cut. In summary, it's hard to get excited about Linc Pen & Plastics from a dividend perspective.

Want to learn more about Linc Pen & Plastics? Here's a visualisation of its historical rate of revenue and earnings growth.

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.

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.

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. Thank you for reading.