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 Union Pacific Corporation (NYSE:UNP) is about to go ex-dividend in just 4 days. 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. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Union Pacific's shares on or after the 31st of August, you won't be eligible to receive the dividend, when it is paid on the 30th of September.

The company's next dividend payment will be US$1.42 per share, on the back of last year when the company paid a total of US$5.52 to shareholders. Last year's total dividend payments show that Union Pacific has a trailing yield of 1.8% on the current share price of US$309.59. 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! As a result, readers should always check whether Union Pacific has been able to grow its dividends, or if the dividend might be cut.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Union Pacific paid out a comfortable 45% of its profit last year. A useful secondary check can be to evaluate whether Union Pacific generated enough free cash flow to afford its dividend. Dividends consumed 50% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Union Pacific'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. With that in mind, we're encouraged by the steady growth at Union Pacific, with earnings per share up 9.3% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth 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 last 10 years, Union Pacific has lifted its dividend by approximately 9.9% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Union Pacific? Earnings per share have been growing at a steady rate, and Union Pacific paid out less than half its profits and more than half its free cash flow as dividends over the last year. In summary, it's hard to get excited about Union Pacific from a dividend perspective.

While it's tempting to invest in Union Pacific for the dividends alone, you should always be mindful of the risks involved.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield dividend stocks.

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.