Readers hoping to buy Monro, Inc. (NASDAQ:MNRO) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 23rd of August, you won't be eligible to receive this dividend, when it is paid on the 9th of September.

Monro's upcoming dividend is US$0.22 a share, following on from the last 12 months, when the company distributed a total of US$0.88 per share to shareholders. Looking at the last 12 months of distributions, Monro has a trailing yield of approximately 1.1% on its current stock price of $78.95. 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 Monro has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Monro

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Monro paid out a comfortable 33% of its profit last year. A useful secondary check can be to evaluate whether Monro generated enough free cash flow to afford its dividend. It paid out 24% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that Monro'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 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 fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Monro, with earnings per share up 7.4% on average over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. Organisations that reinvest heavily in themselves typically get stronger over time, which can bring attractive benefits such as stronger earnings and dividends.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Monro has delivered 19% dividend growth per year on average over the past 10 years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Monro an attractive dividend stock, or better left on the shelf? Earnings per share have been growing moderately, and Monro is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. 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 Monro is halfway there. Monro looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

Wondering what the future holds for Monro? See what the eight analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.