Daodaoquan Grain and Oil Co.,Ltd. (SZSE:002852) is about to trade ex-dividend in the next four days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a 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. This means that investors who purchase Daodaoquan Grain and OilLtd's shares on or after the 4th of June will not receive the dividend, which will be paid on the 4th of June.

The company's upcoming dividend is CN¥0.067 a share, following on from the last 12 months, when the company distributed a total of CN¥0.22 per share to shareholders. Based on the last year's worth of payments, Daodaoquan Grain and OilLtd has a trailing yield of 2.6% on the current stock price of CN¥8.45. If you buy this business for its dividend, you should have an idea of whether Daodaoquan Grain and OilLtd's dividend is reliable and sustainable. So we need to investigate whether Daodaoquan Grain and OilLtd can afford its dividend, and if the dividend could grow.

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. Daodaoquan Grain and OilLtd distributed an unsustainably high 180% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether Daodaoquan Grain and OilLtd generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 4.2% of its cash flow last year.

It's good to see that while Daodaoquan Grain and OilLtd's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Daodaoquan Grain and OilLtd 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. Daodaoquan Grain and OilLtd's earnings per share have plummeted approximately 31% 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. Daodaoquan Grain and OilLtd's dividend payments per share have declined at 3.6% per year on average over the past seven years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

To Sum It Up

Is Daodaoquan Grain and OilLtd an attractive dividend stock, or better left on the shelf? It's not a great combination to see a company with earnings in decline and paying out 180% of its profits, which could imply the dividend may be at risk of being cut in the future. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Daodaoquan Grain and OilLtd's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. Bottom line: Daodaoquan Grain and OilLtd has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that being said, if you're still considering Daodaoquan Grain and OilLtd as an investment, you'll find it beneficial to know what risks this stock is facing. Every company has risks, and we've spotted 4 warning signs for Daodaoquan Grain and OilLtd (of which 1 doesn't sit too well with us!) you should know about.

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.