Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Hardwoods Distribution Inc. (TSE:HDI) is about to trade ex-dividend in the next 2 days. Investors can purchase shares before the 16th of April in order to be eligible for this dividend, which will be paid on the 30th of April.

Hardwoods Distribution's upcoming dividend is CA$0.10 a share, following on from the last 12 months, when the company distributed a total of CA$0.40 per share to shareholders. Last year's total dividend payments show that Hardwoods Distribution has a trailing yield of 1.2% on the current share price of CA$32.31. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for Hardwoods Distribution

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Hardwoods Distribution is paying out just 20% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Luckily it paid out just 9.1% of its free cash flow last year.

It's positive to see that Hardwoods Distribution'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. This is why it's a relief to see Hardwoods Distribution earnings per share are up 8.0% per annum over the last five years. Earnings per share have been increasing steadily and management is reinvesting almost all of the profits back into the business. This is an attractive combination, because when profits are reinvested effectively, growth can compound, with corresponding benefits for earnings and dividends in the future.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Hardwoods Distribution has increased its dividend at approximately 17% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Is Hardwoods Distribution worth buying for its dividend? Earnings per share have been growing moderately, and Hardwoods Distribution is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Hardwoods Distribution is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Hardwoods Distribution, and we would prioritise taking a closer look at it.

In light of that, while Hardwoods Distribution has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 1 warning sign for Hardwoods Distribution that you should be aware of before investing in their shares.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. 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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