Regular readers will know we love our dividends at Simply Wall St, which is why it’s exciting to see Paychex, Inc. (NASDAQ: PAYX) is set 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 a company determines which shareholders are eligible to receive a dividend. It is important to know the ex-dividend date, because any trade in the stock must have settled by the record date. This means that you will need to buy the shares of Paychex before May 11 to receive the dividend, which will be paid on May 26.

The company’s next dividend is $0.79 per share, following the last 12 months when the company distributed a total of $2.64 per share to shareholders. Looking at the last 12 months of distributions, Paychex has a yield of around 2.1% on its current share price of $124.16. Dividends contribute greatly to investment returns for long-term holders, but only if the dividend continues to be paid. So we need to consider whether Paychex can afford its dividend and whether the dividend could increase.

See our latest analysis for Paychex

Dividends are usually paid out of company profits. If a company pays out more dividends than it earns in profits, then the dividend could be unsustainable. Paychex pays out an acceptable 70% of its profits, a common payout level for most companies. That said, even very profitable companies can sometimes not generate enough cash to pay the dividend, so we should always check if the dividend is covered by cash flow. Over the past year, it has paid out 67% of its free cash flow as dividends, within the usual range for most companies.

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.

The story continues

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

Have earnings and dividends increased?

Companies with strong growth prospects are generally the best dividend payers because it is easier to increase dividends when earnings per share improve. If earnings fall and the company is forced to cut its dividend, investors could see the value of their investment go up in smoke. For this reason, we are pleased to see that Paychex’s earnings per share have increased by 12% per year over the past five years. Paychex pays out just over half of its profits, suggesting the company is finding a balance between reinvesting in growth and paying dividends. Given the rapid growth rate of earnings per share and the current level of distribution, there could be a possibility of further increases in dividends in the future.

Another key way to gauge a company’s dividend outlook is to measure its historical rate of dividend growth. Since our data began 10 years ago, 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.

The essential

Should investors buy Paychex for the upcoming dividend? It’s good to see earnings increasing, because all of the best dividend-paying stocks increase their earnings significantly over the long term. 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 – 70% and 67% respectively. In summary, although it has some positive characteristics, we are not inclined to rush out and buy Paychex today.

Wondering what the future holds for Paychex? Discover the forecasts of the 17 analysts we follow, with this visualization of its historical and future estimated earnings and cash flows

A common investment mistake is to buy the first good stock you see. Here you can find a complete list of high yielding dividend stocks.

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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.