Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see freenet AG (ETR:FNTN) is about to trade ex-dividend in the next 2 days. The ex-dividend date is two business days before a company's record date in most cases, which is the date on which the company determines which shareholders are entitled to receive a 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. Thus, you can purchase freenet's shares before the 14th of May in order to receive the dividend, which the company will pay on the 19th of May.

The company's next dividend payment will be €2.07 per share, on the back of last year when the company paid a total of €2.07 to shareholders. Based on the last year's worth of payments, freenet stock has a trailing yield of around 7.6% on the current share price of €27.38. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

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Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, freenet paid out 91% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. A useful secondary check can be to evaluate whether freenet generated enough free cash flow to afford its dividend. Over the last year it paid out 64% of its free cash flow as dividends, within the usual range for most companies.

It's good to see that while freenet's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

View our latest analysis for freenet

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. If earnings fall far enough, the company could be forced to cut its dividend. This is why it's a relief to see freenet earnings per share are up 8.5% per annum over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past 10 years, freenet has increased its dividend at approximately 3.3% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Has freenet got what it takes to maintain its dividend payments? Earnings per share have not grown all that much, and the company is paying out an uncomfortably high percentage of its income. Fortunately it paid out a lower percentage of its cash flow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of freenet.

With that in mind though, if the poor dividend characteristics of freenet don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 1 warning sign for freenet you should know about.

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