Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that EnviTec Biogas AG (ETR:ETG) is about to go ex-dividend in just three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Thus, you can purchase EnviTec Biogas' shares before the 26th of June in order to receive the dividend, which the company will pay on the 28th of June.

The company's next dividend payment will be €3.00 per share, and in the last 12 months, the company paid a total of €3.00 per share. Looking at the last 12 months of distributions, EnviTec Biogas has a trailing yield of approximately 8.6% on its current stock price of €35.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Check out our latest analysis for EnviTec Biogas

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. It paid out 76% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. A useful secondary check can be to evaluate whether EnviTec Biogas generated enough free cash flow to afford its dividend. It paid out 107% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

EnviTec Biogas paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were EnviTec Biogas to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit EnviTec Biogas paid out over the last 12 months.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see EnviTec Biogas's earnings have been skyrocketing, up 58% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. EnviTec Biogas has delivered an average of 27% per year annual increase in its dividend, based on the past nine years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Has EnviTec Biogas got what it takes to maintain its dividend payments? Earnings per share growth is a positive, and the company's payout ratio looks normal. However, we note EnviTec Biogas paid out a much higher percentage of its free cash flow, which makes us uncomfortable. In summary, while it has some positive characteristics, we're not inclined to race out and buy EnviTec Biogas today.

If you're not too concerned about EnviTec Biogas's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Every company has risks, and we've spotted 1 warning sign for EnviTec Biogas you should know about.

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.

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