Readers hoping to buy Serica Energy plc (LON:SQZ) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Serica Energy's shares before the 24th of June to receive the dividend, which will be paid on the 23rd of July.

The company's upcoming dividend is UK£0.035 a share, following on from the last 12 months, when the company distributed a total of UK£0.035 per share to shareholders. Calculating the last year's worth of payments shows that Serica Energy has a trailing yield of 2.8% on the current share price of £1.23. 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 Serica Energy can afford its dividend, and if the dividend could grow.

See our latest analysis for Serica Energy

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Serica Energy paid out 120% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether Serica Energy generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 46% of the free cash flow it generated, which is a comfortable payout ratio.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Serica Energy fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. For this reason, we're glad to see Serica Energy's earnings per share have risen 10% per annum over the last five years.

Given that Serica Energy has only been paying a dividend for a year, there's not much of a past history to draw insight from.

Final Takeaway

Has Serica Energy got what it takes to maintain its dividend payments? It's good to see earnings per share growing and low cashflow payout ratio, although we're uncomfortable with Serica Energy's paying out such a high percentage of its profit. All things considered, we are not particularly enthused about Serica Energy from a dividend perspective.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Case in point: We've spotted 3 warning signs for Serica Energy you should be aware of.

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.

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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