It looks like Zhejiang Zhongcheng Packing Material Co., Ltd. (SZSE:002522) is about to go ex-dividend in the next three 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Zhejiang Zhongcheng Packing Material's shares before the 30th of May to receive the dividend, which will be paid on the 30th of May.

The company's next dividend payment will be CN¥0.035 per share, on the back of last year when the company paid a total of CN¥0.035 to shareholders. Looking at the last 12 months of distributions, Zhejiang Zhongcheng Packing Material has a trailing yield of approximately 0.9% on its current stock price of CN¥3.90. If you buy this business for its dividend, you should have an idea of whether Zhejiang Zhongcheng Packing Material's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's 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 Zhejiang Zhongcheng Packing Material paying out a modest 35% of its earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 67% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Zhejiang Zhongcheng Packing Material'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 how much of its profit Zhejiang Zhongcheng Packing Material paid out over the last 12 months.

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 Zhejiang Zhongcheng Packing Material has grown its earnings rapidly, up 22% a year for the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Zhejiang Zhongcheng Packing Material has seen its dividend decline 7.3% per annum on average over the past 10 years, which is not great to see. Zhejiang Zhongcheng Packing Material is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

The Bottom Line

Should investors buy Zhejiang Zhongcheng Packing Material for the upcoming dividend? From a dividend perspective, we're encouraged to see that earnings per share have been growing, the company is paying out less than half of its earnings, and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. Every company has risks, and we've spotted 1 warning sign for Zhejiang Zhongcheng Packing Material you should know about.

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.