Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Hargreaves Services Plc (LON:HSP) is about to go ex-dividend in just three days. You can purchase shares before the 25th of February in order to receive the dividend, which the company will pay on the 6th of April.

Hargreaves Services's upcoming dividend is UK£0.027 a share, following on from the last 12 months, when the company distributed a total of UK£0.054 per share to shareholders. Based on the last year's worth of payments, Hargreaves Services has a trailing yield of 1.7% on the current stock price of £3.18. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Hargreaves Services

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Last year, Hargreaves Services paid out 223% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. A useful secondary check can be to evaluate whether Hargreaves Services generated enough free cash flow to afford its dividend. It paid out 10% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Hargreaves Services's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Hargreaves Services's earnings per share have plummeted approximately 45% a year over the previous five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Hargreaves Services's dividend payments per share have declined at 8.8% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

Final Takeaway

Should investors buy Hargreaves Services for the upcoming dividend? It's not a great combination to see a company with earnings in decline and paying out 223% of its profits, which could imply the dividend may be at risk of being cut in the future. However, the cash payout ratio was much lower – good news from a dividend perspective – which makes us wonder why there is such a mis-match between income and cashflow. It's not that we think Hargreaves Services is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

So if you're still interested in Hargreaves Services despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Every company has risks, and we've spotted 3 warning signs for Hargreaves Services you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. 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.

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