It looks like ResMed Inc. (NYSE:RMD) is about to go ex-dividend in the next four days. You can purchase shares before the 12th of May in order to receive the dividend, which the company will pay on the 17th of June.

ResMed's next dividend payment will be US$0.39 per share, on the back of last year when the company paid a total of US$1.56 to shareholders. Last year's total dividend payments show that ResMed has a trailing yield of 0.8% on the current share price of $193.1. 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 ResMed can afford its dividend, and if the dividend could grow.

View our latest analysis for ResMed

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see ResMed paying out a modest 50% of its earnings. A useful secondary check can be to evaluate whether ResMed generated enough free cash flow to afford its dividend. Fortunately, it paid out only 31% of its free cash flow in the past year.

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?

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 ResMed earnings per share are up 4.6% per annum over the last five years. Recent earnings growth has been limited. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past nine years, ResMed has increased its dividend at approximately 9.7% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Is ResMed worth buying for its dividend? Earnings per share growth has been growing somewhat, and ResMed is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and ResMed is halfway there. It's a promising combination that should mark this company worthy of closer attention.

So while ResMed looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example - ResMed has 1 warning sign we think 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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