Some investors rely on dividends to grow their wealth, and if you’re one of those dividend sleuths, you might be intrigued to know that Ifirma SA (WSE:IFI) is set to go ex-dividend in just three days. The ex-dividend date is one business day before a company’s record date, which is the date the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is an important date to know because any purchase of shares made on or after this date may mean late settlement which does not appear on the record date. Therefore, if you buy Ifirma shares on or after August 16, you will not be eligible to receive the dividend when it is paid on August 24.

The company’s next dividend payment will be 0.20 zł per share, after last year when the company paid a total of 0.57 zł to shareholders. Based on last year’s payments, Ifirma has a return of 2.8% on the current share price of 20.2 PLN. Dividends contribute greatly to investment returns for long-term holders, but only if the dividend continues to be paid. We need to see if the dividend is covered by earnings and if it increases.

Discover our latest analysis for Ifirma

Dividends are usually paid out of company earnings, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. Fortunately, Ifirma’s payout ratio is modest, at just 36% of profits. A useful secondary check may be to assess whether Ifirma has generated sufficient free cash flow to pay its dividend. Fortunately, its dividend payouts only accounted for 35% of the free cash flow it generated, which is a comfortable payout ratio.

It is encouraging to see that the dividend is covered by both earnings and cash flow. This generally suggests that the dividend is sustainable, as long as earnings don’t drop precipitously.

Click here to see how much of its profits Ifirma has paid out over the past 12 months.

Have earnings and dividends increased?

Companies with strong growth prospects are generally the best dividend payers because it is easier to increase dividends when earnings per share improve. If earnings fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. It is encouraging to see that Ifirma has grown its revenues rapidly, growing by 34% per year over the past five years. Ifirma pays out less than half of its earnings and cash flow, while simultaneously growing earnings per share at a rapid pace. Companies with rising earnings and low payout rates are often the best long-term dividend-paying stocks because the company can both increase its earnings and increase the percentage of earnings it pays out, essentially multiplying the dividend.

Most investors primarily gauge a company’s dividend prospects by checking the historical rate of dividend growth. Ifirma has achieved an average annual increase of 23% per year in its dividend, based on the last 10 years of dividend payments. It’s exciting to see that earnings and dividends per share have grown rapidly over the past few years.

The essential

Is Ifirma an attractive dividend stock, or is it better left on the shelf? It’s great that Ifirma is increasing its earnings per share while simultaneously paying out a small percentage of its earnings and cash flow. It’s disappointing to see the dividend cut at least once in the past, but as things stand the low payout ratio suggests a conservative approach to dividends, which we like. Ifirma looks solid on this overall analysis, and we would definitely consider investigating it further.

So, while Ifirma looks good from a dividend perspective, it’s still worth being aware of the risks in this stock. For example, we found 2 warning signs for Ifirma which we recommend you consider before investing in the company.

If you are looking for strong dividend payers, we recommend by consulting our selection of the best dividend-paying stocks.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.