Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Natural Gas Distribution Company (TADAWUL:9516) is about to trade ex-dividend in the next three days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is important as the process of settlement involves at least two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Natural Gas Distribution's shares on or after the 23rd of June, you won't be eligible to receive the dividend, when it is paid on the 29th of June.

The company's upcoming dividend is ر.س0.60 a share, following on from the last 12 months, when the company distributed a total of ر.س0.50 per share to shareholders. Last year's total dividend payments show that Natural Gas Distribution has a trailing yield of 1.9% on the current share price of ر.س26.40. 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 Natural Gas Distribution can afford its dividend, and if the dividend could grow.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Natural Gas Distribution paying out a modest 41% of its earnings. A useful secondary check can be to evaluate whether Natural Gas Distribution generated enough free cash flow to afford its dividend. The good news is it paid out just 25% of its free cash flow in the last year.

It's positive to see that Natural Gas 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 how much of its profit Natural Gas Distribution paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Natural Gas Distribution's earnings per share have been growing at 12% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Natural Gas Distribution's dividend payments are effectively flat on where they were four years ago.

Final Takeaway

From a dividend perspective, should investors buy or avoid Natural Gas Distribution? Natural Gas Distribution 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.

While it's tempting to invest in Natural Gas Distribution for the dividends alone, you should always be mindful of the risks involved. For example, Natural Gas Distribution has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.

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.