Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Danaos Corporation (NYSE:DAC) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Danaos' shares on or after the 27th of February will not receive the dividend, which will be paid on the 14th of March.

The company's next dividend payment will be US$0.80 per share, and in the last 12 months, the company paid a total of US$3.20 per share. Last year's total dividend payments show that Danaos has a trailing yield of 4.4% on the current share price of US$72.28. 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 Danaos can afford its dividend, and if the dividend could grow.

View our latest analysis for Danaos

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. Danaos has a low and conservative payout ratio of just 11% of its income after tax. A useful secondary check can be to evaluate whether Danaos generated enough free cash flow to afford its dividend. Luckily it paid out just 20% of its free cash flow last year.

It's positive to see that Danaos'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?

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 fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Danaos's earnings have been skyrocketing, up 38% per annum for the past five years. Danaos 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.'

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Danaos has delivered an average of 17% per year annual increase in its dividend, based on the past three years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Has Danaos got what it takes to maintain its dividend payments? Danaos has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Overall we think this is an attractive combination and worthy of further research.

So while Danaos looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 2 warning signs for Danaos that we strongly recommend you have a look at before investing in the company.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.