Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Cisco Systems, Inc. (NASDAQ:CSCO) is about to trade ex-dividend in the next three days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Cisco Systems' shares before the 2nd of October in order to be eligible for the dividend, which will be paid on the 23rd of October.

The company's next dividend payment will be US$0.40 per share, and in the last 12 months, the company paid a total of US$1.60 per share. Last year's total dividend payments show that Cisco Systems has a trailing yield of 3.0% on the current share price of US$53.02. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is 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. Cisco Systems paid out 62% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Cisco Systems generated enough free cash flow to afford its dividend. Dividends consumed 63% 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 Cisco Systems'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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Cisco Systems's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Cisco Systems has delivered 8.9% dividend growth per year on average over the past 10 years.

Final Takeaway

Has Cisco Systems got what it takes to maintain its dividend payments? While earnings per share are flat, at least Cisco Systems has not committed itself to an unsustainable dividend, with its earnings and cashflow payout ratios within reasonable bounds. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Cisco Systems.

Wondering what the future holds for Cisco Systems? See what the 26 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.