Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Diploma PLC (LON:DPLM) is about to trade ex-dividend in the next day or so. 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. In other words, investors can purchase Diploma's shares before the 18th of January in order to be eligible for the dividend, which will be paid on the 2nd of February.

The company's next dividend payment will be UK￡0.40 per share. Last year, in total, the company distributed UK￡0.56 to shareholders. Based on the last year's worth of payments, Diploma has a trailing yield of 1.7% on the current stock price of ￡33.66. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Diploma can afford its dividend, and if the dividend could grow.

Check out our latest analysis for Diploma

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. Diploma paid out 62% of its earnings to investors last year, a normal payout level for most businesses. 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. Fortunately, it paid out only 42% of its free cash flow in the past year.

It's positive to see that Diploma'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. Fortunately for readers, Diploma's earnings per share have been growing at 13% a year for the past five years. Diploma is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.