Copa Holdings, S.A. (NYSE:CPA) is about to trade ex-dividend in the next four days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a 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, Copa Holdings investors that purchase the stock on or after the 30th of August will not receive the dividend, which will be paid on the 13th of September.

The company's upcoming dividend is US$1.61 a share, following on from the last 12 months, when the company distributed a total of US$6.44 per share to shareholders. Looking at the last 12 months of distributions, Copa Holdings has a trailing yield of approximately 7.1% on its current stock price of US$91.19. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's 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. Copa Holdings paid out a comfortable 30% of its profit last year. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It paid out more than half (51%) of its free cash flow in the past year, which is within an average range for most companies.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's comforting to see Copa Holdings's earnings have been skyrocketing, up 51% per annum for the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Copa Holdings has lifted its dividend by approximately 5.3% a year on average. Earnings per share have been growing much quicker than dividends, potentially because Copa Holdings is keeping back more of its profits to grow the business.

To Sum It Up

From a dividend perspective, should investors buy or avoid Copa Holdings? Earnings per share have grown at a nice rate in recent times and over the last year, Copa Holdings paid out less than half its earnings and a bit over half its free cash flow. There's a lot to like about Copa Holdings, and we would prioritise taking a closer look at it.

In light of that, while Copa Holdings has an appealing dividend, it's worth knowing the risks involved with this stock. For example - Copa Holdings has 2 warning signs we think 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.