Readers hoping to buy Sonoco Products Company (NYSE:SON) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Therefore, if you purchase Sonoco Products' shares on or after the 10th of August, you won't be eligible to receive the dividend, when it is paid on the 10th of September.

The company's next dividend payment will be US$0.54 per share, on the back of last year when the company paid a total of US$2.16 to shareholders. Based on the last year's worth of payments, Sonoco Products has a trailing yield of 3.7% on the current stock price of US$58.62. 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 Sonoco Products can afford its dividend, and if the dividend could grow.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Sonoco Products paid out a comfortable 33% of its profit last year. 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. It paid out more than half (59%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Sonoco Products'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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Sonoco Products's earnings have been skyrocketing, up 26% per annum for the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Sonoco Products has increased its dividend at approximately 4.4% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Sonoco Products is keeping back more of its profits to grow the business.

Final Takeaway

Should investors buy Sonoco Products for the upcoming dividend? Earnings per share have grown at a nice rate in recent times and over the last year, Sonoco Products paid out less than half its earnings and a bit over half its free cash flow. Sonoco Products looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces.

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.