It looks like West Fraser Timber Co. Ltd. (TSE:WFG) is about to go ex-dividend in the next 3 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase West Fraser Timber's shares before the 26th of September in order to be eligible for the dividend, which will be paid on the 11th of October.

The company's next dividend payment will be US$0.32 per share, on the back of last year when the company paid a total of US$1.28 to shareholders. Based on the last year's worth of payments, West Fraser Timber has a trailing yield of 1.3% on the current stock price of CA$129.10. If you buy this business for its dividend, you should have an idea of whether West Fraser Timber's dividend is reliable and sustainable. As a result, readers should always check whether West Fraser Timber has been able to grow its dividends, or if the dividend might be cut.

Check out our latest analysis for West Fraser Timber

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. West Fraser Timber paid out 69% of its earnings to investors last year, a normal payout level for most businesses. 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. It distributed 34% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that West Fraser Timber'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 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 West Fraser Timber's 26% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, West Fraser Timber has increased its dividend at approximately 18% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

To Sum It Up

From a dividend perspective, should investors buy or avoid West Fraser Timber? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. To summarise, West Fraser Timber looks okay on this analysis, although it doesn't appear a stand-out opportunity.

So if you want to do more digging on West Fraser Timber, you'll find it worthwhile knowing the risks that this stock faces. For example - West Fraser Timber has 1 warning sign we think you should be aware of.

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.