LifeVantage Corporation (NASDAQ:LFVN) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before a company's record date, 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 a full business day. So if you miss that date, you would not show up on the company's books on the record date. This means that investors who purchase LifeVantage's shares on or after the 1st of December will not receive the dividend, which will be paid on the 15th of December.

The company's upcoming dividend is US$0.045 a share, following on from the last 12 months, when the company distributed a total of US$0.18 per share to shareholders. Based on the last year's worth of payments, LifeVantage stock has a trailing yield of around 2.7% on the current share price of US$6.77. 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.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. LifeVantage is paying out just 21% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether LifeVantage generated enough free cash flow to afford its dividend. It paid out 25% of its free cash flow as dividends last year, which is conservatively low.

It's positive to see that LifeVantage'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 with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. It's not encouraging to see that LifeVantage's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. LifeVantage has delivered an average of 11% per year annual increase in its dividend, based on the past four years of dividend payments.

To Sum It Up

Should investors buy LifeVantage for the upcoming dividend? While it's not great to see that earnings per share are effectively flat over the four-year period we checked, at least the payout ratios are low and conservative. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of LifeVantage's dividend merits.

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

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.