Readers hoping to buy Northern Technologies International Corporation (NASDAQ:NTIC) 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Northern Technologies International investors that purchase the stock on or after the 3rd of August will not receive the dividend, which will be paid on the 18th of August.

The company's next dividend payment will be US$0.065 per share. Last year, in total, the company distributed US$0.26 to shareholders. Last year's total dividend payments show that Northern Technologies International has a trailing yield of 1.4% on the current share price of $18.68. If you buy this business for its dividend, you should have an idea of whether Northern Technologies International's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Northern Technologies International

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. That's why it's good to see Northern Technologies International paying out a modest 41% of its earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (66%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Northern Technologies International'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 how much of its profit Northern Technologies International paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Northern Technologies International earnings per share are up 9.7% per annum over the last five years. Decent historical earnings per share growth suggests Northern Technologies International has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. Therefore it's unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Northern Technologies International has delivered an average of 6.8% per year annual increase in its dividend, based on the past four 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 Northern Technologies International? Earnings per share have been growing at a steady rate, and Northern Technologies International paid out less than half its profits and more than half its free cash flow as dividends over the last year. In summary, while it has some positive characteristics, we're not inclined to race out and buy Northern Technologies International today.

While it's tempting to invest in Northern Technologies International for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 1 warning sign for Northern Technologies International you should be aware of.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. 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.

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