Readers hoping to buy 2 Cheap Cars Group Limited (NZSE:2CC) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. This means that investors who purchase 2 Cheap Cars Group's shares on or after the 30th of May will not receive the dividend, which will be paid on the 14th of June.

The company's next dividend payment will be NZ$0.0489411 per share, on the back of last year when the company paid a total of NZ$0.083 to shareholders. Based on the last year's worth of payments, 2 Cheap Cars Group stock has a trailing yield of around 9.2% on the current share price of NZ$0.90. 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 2 Cheap Cars Group can afford its dividend, and if the dividend could grow.

See our latest analysis for 2 Cheap Cars Group

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 2 Cheap Cars Group paying out a modest 34% of its earnings. A useful secondary check can be to evaluate whether 2 Cheap Cars Group generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 31% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that 2 Cheap Cars Group's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see how much of its profit 2 Cheap Cars Group paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. 2 Cheap Cars Group's earnings per share have fallen at approximately 13% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.