Sirius XM Holdings Inc. (NASDAQ:SIRI) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Therefore, if you purchase Sirius XM Holdings' shares on or after the 5th of November, you won't be eligible to receive the dividend, when it is paid on the 21st of November.

The company's next dividend payment will be US$0.27 per share. Last year, in total, the company distributed US$1.08 to shareholders. Last year's total dividend payments show that Sirius XM Holdings has a trailing yield of 4.1% on the current share price of US$26.66. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Sirius XM Holdings can afford its dividend, and if the dividend could grow.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Sirius XM 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. Given that the company reported a loss last year, we now need to see if it generated enough free cash flow to fund the 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 42% of its free cash flow as dividends, a comfortable payout level for most companies.

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

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Sirius XM Holdings was unprofitable last year and, unfortunately, the general trend suggests its earnings have been in decline over the last five years, making us wonder if the dividend is sustainable at all.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Sirius XM Holdings has delivered an average of 13% per year annual increase in its dividend, based on the past eight years of dividend payments.

Get our latest analysis on Sirius XM Holdings's balance sheet health here.

The Bottom Line

Is Sirius XM Holdings worth buying for its dividend? It's hard to get used to Sirius XM Holdings paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not that we think Sirius XM Holdings is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Sirius XM Holdings. For example, Sirius XM Holdings has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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.