NVE Corporation (NASDAQ:NVEC) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Thus, you can purchase NVE's shares before the 26th of January in order to receive the dividend, which the company will pay on the 28th of February.

The company's upcoming dividend is US$1.00 a share, following on from the last 12 months, when the company distributed a total of US$4.00 per share to shareholders. Based on the last year's worth of payments, NVE has a trailing yield of 5.2% on the current stock price of $77.35. If you buy this business for its dividend, you should have an idea of whether NVE's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

See our latest analysis for NVE

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. Its dividend payout ratio is 90% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether NVE generated enough free cash flow to afford its dividend. It paid out 100% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

NVE paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Cash is king, as they say, and were NVE to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit NVE paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at NVE, with earnings per share up 9.2% on average over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. NVE's dividend payments are effectively flat on where they were nine years ago.

The Bottom Line

Is NVE an attractive dividend stock, or better left on the shelf? Earnings per share have grown somewhat, although NVE paid out over half its profits and the dividend was not well covered by free cash flow. It's not that we think NVE is a bad company, but these characteristics don't generally lead to outstanding dividend performance.

Although, if you're still interested in NVE and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 1 warning sign for NVE you should know about.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.