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Readers hoping to buy DFM Foods Limited (NSE:DFM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You will need to purchase shares before the 25th of July to receive the dividend, which will be paid on the 23rd of August.

DFM Foods's upcoming dividend is ₹1.25 a share, following on from the last 12 months, when the company distributed a total of ₹1.25 per share to shareholders. Based on the last year's worth of payments, DFM Foods has a trailing yield of 0.5% on the current stock price of ₹267.55. If you buy this business for its dividend, you should have an idea of whether DFM Foods's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for DFM Foods

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. DFM Foods has a low and conservative payout ratio of just 18% of its income after tax. 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 paid out 12% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that DFM Foods'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 DFM Foods paid out over the last 12 months.

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 earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see DFM Foods has grown its earnings rapidly, up 38% a year for the past five years. DFM Foods earnings per share have been sprinting ahead like the Road Runner at a track and field day; scarcely stopping even for a cheeky "beep-beep". We also like that it is reinvesting most of its profits in its business.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, DFM Foods has increased its dividend at approximately 29% a year on average. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

Final Takeaway

Is DFM Foods an attractive dividend stock, or better left on the shelf? We love that DFM Foods is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. Overall we think this is an attractive combination and worthy of further research.

Want to learn more about DFM Foods's dividend performance? Check out this visualisation of its historical revenue and earnings growth.

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.

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.