Magic Software Enterprises Ltd. (NASDAQ:MGIC) is about to trade ex-dividend in the next 4 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, Magic Software Enterprises investors that purchase the stock on or after the 29th of August will not receive the dividend, which will be paid on the 13th of September.

The company's upcoming dividend is US$0.33 a share, following on from the last 12 months, when the company distributed a total of US$0.65 per share to shareholders. Last year's total dividend payments show that Magic Software Enterprises has a trailing yield of 5.5% on the current share price of $11.95. If you buy this business for its dividend, you should have an idea of whether Magic Software Enterprises's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Magic Software Enterprises

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Magic Software Enterprises paid out 72% 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 39% of its free cash flow as dividends, a comfortable payout level 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 how much of its profit Magic Software Enterprises paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Magic Software Enterprises has grown its earnings rapidly, up 20% a year for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Magic Software Enterprises could have strong prospects for future increases to the dividend.