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 Jiangshan Oupai Door Industry Co., Ltd (SHSE:603208) is about to go ex-dividend in just two 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Jiangshan Oupai Door Industry investors that purchase the stock on or after the 19th of June will not receive the dividend, which will be paid on the 19th of June.

The company's upcoming dividend is CN¥1.78 a share, following on from the last 12 months, when the company distributed a total of CN¥1.78 per share to shareholders. Based on the last year's worth of payments, Jiangshan Oupai Door Industry stock has a trailing yield of around 7.8% on the current share price of CN¥22.81. 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 Jiangshan Oupai Door Industry 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. Its dividend payout ratio is 87% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be worried about the risk of a drop in earnings. 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. Jiangshan Oupai Door Industry paid out more free cash flow than it generated - 164%, 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 Jiangshan Oupai Door Industry'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 Jiangshan Oupai Door Industry'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?

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. Fortunately for readers, Jiangshan Oupai Door Industry's earnings per share have been growing at 19% a year for the past five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Jiangshan Oupai Door Industry has delivered 38% dividend growth per year on average over the past seven years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Has Jiangshan Oupai Door Industry got what it takes to maintain its dividend payments? The best dividend stocks typically boast a long history of growing earnings per share (EPS) via a combination of earnings growth and buybacks. That's why we're glad to see Jiangshan Oupai Door Industry growing its EPS, buying back stock and paying out a reasonable percentage of its earnings as dividends. However, we note with some concern that it paid out 164% of its free cash flow last year, which is uncomfortably high and makes us wonder why the company chose to spend even more cash on buybacks. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Jiangshan Oupai Door Industry's dividend merits.

With that being said, if dividends aren't your biggest concern with Jiangshan Oupai Door Industry, you should know about the other risks facing this business. In terms of investment risks, we've identified 2 warning signs with Jiangshan Oupai Door Industry and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com