Readers hoping to buy Natural Grocers by Vitamin Cottage, Inc. (NYSE:NGVC) 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. 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. Therefore, if you purchase Natural Grocers by Vitamin Cottage's shares on or after the 17th of August, you won't be eligible to receive the dividend, when it is paid on the 2nd of September.

The company's next dividend payment will be US$0.15 per share, and in the last 12 months, the company paid a total of US$0.60 per share. Calculating the last year's worth of payments shows that Natural Grocers by Vitamin Cottage has a trailing yield of 2.2% on the current share price of US$27.43. 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 Natural Grocers by Vitamin Cottage 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 Natural Grocers by Vitamin Cottage's payout ratio is modest, at just 28% of profit. A useful secondary check can be to evaluate whether Natural Grocers by Vitamin Cottage generated enough free cash flow to afford its dividend. Dividends consumed 59% 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 Natural Grocers by Vitamin Cottage'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. Fortunately for readers, Natural Grocers by Vitamin Cottage's earnings per share have been growing at 18% a year for the past five years. Natural Grocers by Vitamin Cottage is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Natural Grocers by Vitamin Cottage has delivered 12% dividend growth per year on average over the past seven years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

To Sum It Up

Is Natural Grocers by Vitamin Cottage worth buying for its dividend? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. It's a promising combination that should mark this company worthy of closer attention.

So while Natural Grocers by Vitamin Cottage 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.