Looks like Paychex, Inc. (NASDAQ:PAYX) is set to go ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date a company determines which shareholders are eligible to receive a dividend. The ex-dividend date is an important date to know because any purchase of shares made on or after this date may mean late settlement which does not appear on the record date. So, you can buy Paychex shares before January 28 in order to receive the dividend, which the company will pay on February 24.

The company’s next dividend payment will be $0.66 per share, and over the past 12 months the company has paid a total of $2.64 per share. Calculating the value of last year’s payouts shows that Paychex has a 2.2% yield on the current share price of $118.67. We love to see companies pay out a dividend, but it’s also important to make sure that laying the golden eggs doesn’t kill our golden hen! We need to see if the dividend is covered by earnings and if it increases.

Check out our latest analysis for Paychex

Dividends are usually paid out of company profits, so if a company pays out more than it has earned, its dividend is usually at risk of being reduced. Paychex pays out an acceptable 73% of its profits, a common payout level for most companies. Still, cash flow is even more important than earnings in evaluating a dividend, so we need to see if the company has generated enough cash to pay its distribution. Dividends consumed 74% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organizations.

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

Click here to see the company’s payout ratio, as well as analysts’ estimates of its future dividends.

Have earnings and dividends increased?

Companies with consistently rising earnings per share tend to create the best dividend-paying stocks because they generally find it easier to increase dividends per share. If earnings fall enough, the company could be forced to cut its dividend. Luckily for readers, Paychex’s earnings per share have grown 11% annually over the past five years. Paychex has an average payout ratio that suggests a balance between earnings growth and shareholder reward. This is a reasonable combination that could portend further dividend increases in the future.

Another key way to gauge a company’s dividend outlook is to measure its historical rate of dividend growth. Over the past 10 years, Paychex has increased its dividend by around 7.8% per year on average. We are pleased to see dividends increasing alongside earnings over several years, which may be a sign that the company intends to share the growth with shareholders.

Last takeaway

Is Paychex an attractive dividend stock, or is it better left on the shelf? Higher earnings per share generally result in higher dividends from long-term dividend-paying stocks. That’s why we’re happy to see Paychex’s earnings per share increase, even though, as we’ve seen, the company pays out more than half of its earnings and cash – 73% and 74% respectively. It might be worth investigating whether the company is reinvesting in growth projects that could boost earnings and dividends in the future, but so far we’re not so optimistic about its dividend outlook.

On that note, you will want to research the risks that Paychex faces. For example – Paychex has 1 warning sign we think you should know.

If you’re looking for dividend-paying stocks, we recommend checking out our list of the best dividend-paying stocks with a yield above 2% and an upcoming dividend.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.