Readers hoping to buy Xinxiang Richful Lube Additive Co.,Ltd. (SZSE:300910) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. 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. In other words, investors can purchase Xinxiang Richful Lube AdditiveLtd's shares before the 28th of May in order to be eligible for the dividend, which will be paid on the 28th of May.

The company's next dividend payment will be CN¥1.30 per share, on the back of last year when the company paid a total of CN¥1.30 to shareholders. Calculating the last year's worth of payments shows that Xinxiang Richful Lube AdditiveLtd has a trailing yield of 2.7% on the current share price of CN¥47.59. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are 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. Fortunately Xinxiang Richful Lube AdditiveLtd's payout ratio is modest, at just 45% of profit. 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. Xinxiang Richful Lube AdditiveLtd paid out more free cash flow than it generated - 193%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

While Xinxiang Richful Lube AdditiveLtd's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Xinxiang Richful Lube AdditiveLtd's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Xinxiang Richful Lube AdditiveLtd's earnings have been skyrocketing, up 47% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Xinxiang Richful Lube AdditiveLtd has delivered 46% dividend growth per year on average over the past three years. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.

Final Takeaway

Has Xinxiang Richful Lube AdditiveLtd got what it takes to maintain its dividend payments? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. In summary, while it has some positive characteristics, we're not inclined to race out and buy Xinxiang Richful Lube AdditiveLtd today.

So while Xinxiang Richful Lube AdditiveLtd looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Be aware that Xinxiang Richful Lube AdditiveLtd is showing 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.