Readers hoping to buy VAALCO Energy, Inc. (NYSE:EGY) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. Meaning, you will need to purchase VAALCO Energy's shares before the 22nd of November to receive the dividend, which will be paid on the 20th of December.

The company's next dividend payment will be US$0.0625 per share. Last year, in total, the company distributed US$0.25 to shareholders. Based on the last year's worth of payments, VAALCO Energy has a trailing yield of 4.8% on the current stock price of US$5.26. 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 VAALCO Energy can afford its dividend, and if the dividend could grow.

See our latest analysis for VAALCO Energy

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately VAALCO Energy's payout ratio is modest, at just 29% of profit. A useful secondary check can be to evaluate whether VAALCO Energy generated enough free cash flow to afford its dividend. Over the last year it paid out 66% of its free cash flow as dividends, within the usual range for most companies.

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?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by VAALCO Energy's 12% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last three years, VAALCO Energy has lifted its dividend by approximately 24% a year on average.

The Bottom Line

Is VAALCO Energy worth buying for its dividend? Earnings per share have fallen significantly, although at least VAALCO Energy paid out less than half of its profits and free cash flow over the last year, leaving some margin of safety. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

With that being said, if dividends aren't your biggest concern with VAALCO Energy, you should know about the other risks facing this business. To help with this, we've discovered 1 warning sign for VAALCO Energy that you should be aware of before investing in their shares.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.