It looks like Starbucks Corporation (NASDAQ:SBUX) is about to go ex-dividend in the next four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Accordingly, Starbucks investors that purchase the stock on or after the 15th of November will not receive the dividend, which will be paid on the 29th of November.

The company's next dividend payment will be US$0.61 per share, and in the last 12 months, the company paid a total of US$2.44 per share. Looking at the last 12 months of distributions, Starbucks has a trailing yield of approximately 2.5% on its current stock price of US$97.55. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Starbucks 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. Starbucks paid out more than half (70%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Starbucks generated enough free cash flow to afford its dividend. It paid out 78% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

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 in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Starbucks earnings per share are up 2.4% per annum over the last five years. A payout ratio of 70% looks like a tacit signal from management that reinvestment opportunities in the business are low. In line with limited earnings growth in recent years, this is not the most appealing combination.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Starbucks has delivered 17% dividend growth per year on average over the past 10 years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

Should investors buy Starbucks for the upcoming dividend? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear excessive. In summary, while it has some positive characteristics, we're not inclined to race out and buy Starbucks today.

If you're not too concerned about Starbucks's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Every company has risks, and we've spotted 2 warning signs for Starbucks (of which 1 can't be ignored!) you should know about.

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.