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 CVS Health Corporation (NYSE:CVS) is about to go ex-dividend in just 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Thus, you can purchase CVS Health's shares before the 21st of October in order to receive the dividend, which the company will pay on the 1st of November.

The company's next dividend payment will be US$0.665 per share. Last year, in total, the company distributed US$2.66 to shareholders. Looking at the last 12 months of distributions, CVS Health has a trailing yield of approximately 4.1% on its current stock price of US$65.00. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether CVS Health can afford its dividend, and if the dividend could grow.

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. That's why it's good to see CVS Health paying out a modest 45% of its earnings. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Dividends consumed 62% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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

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

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're not enthused to see that CVS Health's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, CVS Health has lifted its dividend by approximately 9.2% a year on average.

To Sum It Up

Is CVS Health an attractive dividend stock, or better left on the shelf? CVS Health has struggled to grow earnings per share, and it's paying out less than half of its earnings and more than half its cash flow to shareholders as dividends. To summarise, CVS Health looks okay on this analysis, although it doesn't appear a stand-out opportunity.

So while CVS Health looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Our analysis shows 1 warning sign for CVS Health and you should be aware of this before buying any shares.

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.