ChoiceOne Financial Services, Inc. (NASDAQ:COFS) stock is about to trade ex-dividend in 3 days. The ex-dividend date is usually set to be one business day before the record date, which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, ChoiceOne Financial Services investors that purchase the stock on or after the 15th of June will not receive the dividend, which will be paid on the 30th of June.

The company's next dividend payment will be US$0.29 per share. Last year, in total, the company distributed US$1.16 to shareholders. Based on the last year's worth of payments, ChoiceOne Financial Services stock has a trailing yield of around 3.6% on the current share price of US$32.57. 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 ChoiceOne Financial Services 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. Fortunately ChoiceOne Financial Services's payout ratio is modest, at just 31% of profit.

Companies that pay out less in dividends than they earn in profits generally have more sustainable dividends. The lower the payout ratio, the more wiggle room the business has before it could be forced to cut the dividend.

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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Fortunately for readers, ChoiceOne Financial Services's earnings per share have been growing at 12% a year for the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. ChoiceOne Financial Services has delivered an average of 6.5% per year annual increase in its dividend, based on the past 10 years of dividend payments. 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

From a dividend perspective, should investors buy or avoid ChoiceOne Financial Services? Companies like ChoiceOne Financial Services that are growing rapidly and paying out a low fraction of earnings, are usually reinvesting heavily in their business. This strategy can add significant value to shareholders over the long term - as long as it's done without issuing too many new shares. ChoiceOne Financial Services ticks a lot of boxes for us from a dividend perspective, and we think these characteristics should mark the company as deserving of further attention.

So while ChoiceOne Financial Services looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.