Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Xuchang KETOP Testing Research Institute Co.,Ltd (SZSE:003008) is about to trade ex-dividend in the next 4 days. 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. 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, Xuchang KETOP Testing Research InstituteLtd investors that purchase the stock on or after the 27th of May will not receive the dividend, which will be paid on the 27th of May.

The company's upcoming dividend is CN¥0.30 a share, following on from the last 12 months, when the company distributed a total of CN¥0.30 per share to shareholders. Based on the last year's worth of payments, Xuchang KETOP Testing Research InstituteLtd has a trailing yield of 1.3% on the current stock price of CN¥22.31. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Xuchang KETOP Testing Research InstituteLtd has been able to grow its dividends, or if the dividend might be cut.

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. Fortunately Xuchang KETOP Testing Research InstituteLtd's payout ratio is modest, at just 43% of profit. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Dividends consumed 72% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

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 Xuchang KETOP Testing Research InstituteLtd paid out over the last 12 months.

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. Xuchang KETOP Testing Research InstituteLtd's earnings per share have fallen at approximately 17% a year over the previous five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Xuchang KETOP Testing Research InstituteLtd's dividend payments per share have declined at 21% per year on average over the past three years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

From a dividend perspective, should investors buy or avoid Xuchang KETOP Testing Research InstituteLtd? Its earnings per share have been declining meaningfully, although it is paying out less than half its income and more than half its cash flow as dividends. Neither payout ratio appears an immediate concern, but we're concerned about the earnings. To summarise, Xuchang KETOP Testing Research InstituteLtd looks okay on this analysis, although it doesn't appear a stand-out opportunity.

With that being said, if dividends aren't your biggest concern with Xuchang KETOP Testing Research InstituteLtd, you should know about the other risks facing this business. We've identified 3 warning signs with Xuchang KETOP Testing Research InstituteLtd (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

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.