It looks like Servcorp Limited (ASX:SRV) is about to go ex-dividend in the next 4 days. 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 important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Servcorp's shares before the 4th of September to receive the dividend, which will be paid on the 5th of October.

The company's next dividend payment will be AU$0.12 per share. Last year, in total, the company distributed AU$0.24 to shareholders. Looking at the last 12 months of distributions, Servcorp has a trailing yield of approximately 8.0% on its current stock price of A$3.01. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Servcorp

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Servcorp paid out 192% 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. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out 13% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Servcorp's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Servcorp earnings per share are up 2.2% per annum over the last five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Servcorp has lifted its dividend by approximately 1.1% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid Servcorp? Servcorp has been steadily growing its earnings per share, and it is paying out just 13% of its cash flow but an uncomfortably high 192% of its income. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Servcorp's dividend merits.

If you want to look further into Servcorp, it's worth knowing the risks this business faces. Case in point: We've spotted 3 warning signs for Servcorp you should be aware of.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.