Otter Tail Corporation (NASDAQ:OTTR) stock is about to trade ex-dividend in 4 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. This means that investors who purchase Otter Tail's shares on or after the 14th of February will not receive the dividend, which will be paid on the 8th of March.

The company's next dividend payment will be US$0.4675 per share. Last year, in total, the company distributed US$1.75 to shareholders. Based on the last year's worth of payments, Otter Tail stock has a trailing yield of around 2.0% on the current share price of US$95.52. 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.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Otter Tail's payout ratio is modest, at just 26% of profit. 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 more than half (51%) of its free cash flow in the past year, which is within an average range for most companies.

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?

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Otter Tail has grown its earnings rapidly, up 29% a year for the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Otter Tail has lifted its dividend by approximately 4.6% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Otter Tail is keeping back more of its profits to grow the business.

Final Takeaway

From a dividend perspective, should investors buy or avoid Otter Tail? Earnings per share have grown at a nice rate in recent times and over the last year, Otter Tail paid out less than half its earnings and a bit over half its free cash flow. Otter Tail looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

On that note, you'll want to research what risks Otter Tail is facing. For instance, we've identified 2 warning signs for Otter Tail (1 can't be ignored) 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.