Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Hewlett Packard Enterprise Company (NYSE:HPE) is about to trade ex-dividend in the next 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 important as the process of settlement involves a full business day. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase Hewlett Packard Enterprise's shares before the 16th of June in order to receive the dividend, which the company will pay on the 15th of July.

The company's next dividend payment will be US$0.1425 per share. Last year, in total, the company distributed US$0.57 to shareholders. Based on the last year's worth of payments, Hewlett Packard Enterprise has a trailing yield of 1.3% on the current stock price of US$45.49. 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 check whether the dividend payments are covered, and if earnings are growing.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Hewlett Packard Enterprise is paying out an acceptable 50% of its profit, a common payout level among most companies. 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 21% of its free cash flow last year.

It's positive to see that Hewlett Packard Enterprise'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?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Hewlett Packard Enterprise's earnings per share have fallen at approximately 17% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Hewlett Packard Enterprise has delivered an average of 10.0% per year annual increase in its dividend, based on the past 10 years of dividend payments. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

The Bottom Line

Should investors buy Hewlett Packard Enterprise for the upcoming dividend? We're not enthused by the declining earnings per share, although at least the company's payout ratio is within a reasonable range, meaning it may not be at imminent risk of a dividend cut. In summary, while it has some positive characteristics, we're not inclined to race out and buy Hewlett Packard Enterprise today.

If you're not too concerned about Hewlett Packard Enterprise's ability to pay dividends, you should still be mindful of some of the other risks that this business 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.