Readers hoping to buy Shenzhen AOTO Electronics Co., Ltd. (SZSE:002587) 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 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. Therefore, if you purchase Shenzhen AOTO Electronics' shares on or after the 31st of May, you won't be eligible to receive the dividend, when it is paid on the 31st of May.

The company's next dividend payment will be CN¥0.06 per share. Last year, in total, the company distributed CN¥0.06 to shareholders. Last year's total dividend payments show that Shenzhen AOTO Electronics has a trailing yield of 1.0% on the current share price of CN¥5.81. If you buy this business for its dividend, you should have an idea of whether Shenzhen AOTO Electronics's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Shenzhen AOTO Electronics paid out a disturbingly high 372% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. A useful secondary check can be to evaluate whether Shenzhen AOTO Electronics generated enough free cash flow to afford its dividend. Shenzhen AOTO Electronics paid out more free cash flow than it generated - 163%, to be precise - last year, which we think is concerningly high. We're curious about why the company paid out more cash than it generated last year, since this can be one of the early signs that a dividend may be unsustainable.

Shenzhen AOTO Electronics does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

As Shenzhen AOTO Electronics's dividend was not well covered by either earnings or cash flow, we would be concerned that this dividend could be at risk over the long term.

Click here to see how much of its profit Shenzhen AOTO Electronics paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. Shenzhen AOTO Electronics's earnings per share have plummeted approximately 43% a year over the previous five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Shenzhen AOTO Electronics has lifted its dividend by approximately 4.3% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. Shenzhen AOTO Electronics is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

Should investors buy Shenzhen AOTO Electronics for the upcoming dividend? It's looking like an unattractive opportunity, with its earnings per share declining, while, paying out an uncomfortably high percentage of both its profits (372%) and cash flow as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. Overall it doesn't look like the most suitable dividend stock for a long-term buy and hold investor.

Although, if you're still interested in Shenzhen AOTO Electronics and want to know more, you'll find it very useful to know what risks this stock faces. For example, Shenzhen AOTO Electronics has 4 warning signs (and 2 which shouldn't be ignored) we think 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.