Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that SGSG Science&Technology Co., Ltd. Zhuhai (SZSE:300561) is about to go ex-dividend in just 3 days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a 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. This means that investors who purchase SGSG Science&Technology Zhuhai's shares on or after the 31st of May will not receive the dividend, which will be paid on the 31st 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, SGSG Science&Technology Zhuhai has a trailing yield of approximately 0.4% on its current stock price of CN¥8.19. 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 investigate whether SGSG Science&Technology Zhuhai can afford its dividend, and if the dividend could grow.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. SGSG Science&Technology Zhuhai paid out a disturbingly high 219% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. 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. SGSG Science&Technology Zhuhai paid out more free cash flow than it generated - 139%, 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.

As SGSG Science&Technology Zhuhai'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 SGSG Science&Technology Zhuhai paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. SGSG Science&Technology Zhuhai's earnings per share have plummeted approximately 39% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. SGSG Science&Technology Zhuhai has seen its dividend decline 7.7% per annum on average over the past seven years, which is not great to see. 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 SGSG Science&Technology Zhuhai? Not only are earnings per share declining, but SGSG Science&Technology Zhuhai is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. This is a starkly negative combination that often suggests a dividend cut could be in the company's near future. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of SGSG Science&Technology Zhuhai.

With that in mind though, if the poor dividend characteristics of SGSG Science&Technology Zhuhai don't faze you, it's worth being mindful of the risks involved with this business. We've identified 2 warning signs with SGSG Science&Technology Zhuhai (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

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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.