Readers hoping to buy Prestal Holdings Limited (ASX:PTL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 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. In other words, investors can purchase Prestal Holdings' shares before the 16th of May in order to be eligible for the dividend, which will be paid on the 24th of May.

The company's next dividend payment will be AU$0.18 per share, on the back of last year when the company paid a total of AU$0.023 to shareholders. Based on the last year's worth of payments, Prestal Holdings stock has a trailing yield of around 7.0% on the current share price of AU$0.33. 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.

Check out our latest analysis for Prestal Holdings

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. Prestal Holdings paid a dividend last year despite being unprofitable. This might be a one-off event, but it's not a sustainable state of affairs in the long run. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If cash earnings don't cover the dividend, the company would have to pay dividends out of cash in the bank, or by borrowing money, neither of which is long-term sustainable. It distributed 36% of its free cash flow as dividends, a comfortable payout level for most companies.

Click here to see how much of its profit Prestal Holdings 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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Prestal Holdings reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Prestal Holdings has delivered an average of 2.5% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

Remember, you can always get a snapshot of Prestal Holdings's financial health, by checking our visualisation of its financial health, here.

Final Takeaway

Should investors buy Prestal Holdings for the upcoming dividend? It's hard to get used to Prestal Holdings paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. In summary, it's hard to get excited about Prestal Holdings from a dividend perspective.

In light of that, while Prestal Holdings has an appealing dividend, it's worth knowing the risks involved with this stock. Case in point: We've spotted 2 warning signs for Prestal Holdings you should be aware of.

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

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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.