Readers hoping to buy Autek China Inc. (SZSE:300595) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Accordingly, Autek China investors that purchase the stock on or after the 16th of May will not receive the dividend, which will be paid on the 16th of May.

The company's next dividend payment will be CN¥0.223 per share, and in the last 12 months, the company paid a total of CN¥0.22 per share. Based on the last year's worth of payments, Autek China stock has a trailing yield of around 1.2% on the current share price of CN¥19.39. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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. That's why it's good to see Autek China paying out a modest 29% of its earnings. A useful secondary check can be to evaluate whether Autek China generated enough free cash flow to afford its dividend. Fortunately, it paid out only 25% of its free cash flow in the past year.

It's positive to see that Autek China'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 strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Autek China has grown its earnings rapidly, up 24% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past seven years, Autek China has increased its dividend at approximately 34% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

From a dividend perspective, should investors buy or avoid Autek China? We love that Autek China is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while Autek China has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for Autek China and you should be aware of this before buying any 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.