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 Inner Mongolia ERDOS Resources Co.,Ltd. (SHSE:600295) is about to go ex-dividend in just 2 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. Meaning, you will need to purchase Inner Mongolia ERDOS ResourcesLtd's shares before the 26th of June to receive the dividend, which will be paid on the 26th of June.

The company's next dividend payment will be CN¥0.80 per share. Last year, in total, the company distributed CN¥0.80 to shareholders. Last year's total dividend payments show that Inner Mongolia ERDOS ResourcesLtd has a trailing yield of 7.3% on the current share price of CN¥10.98. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Last year, Inner Mongolia ERDOS ResourcesLtd paid out 100% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. 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. Fortunately, it paid out only 35% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Inner Mongolia ERDOS ResourcesLtd fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. 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 Inner Mongolia ERDOS ResourcesLtd 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. Fortunately for readers, Inner Mongolia ERDOS ResourcesLtd's earnings per share have been growing at 11% a year for the past five years.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, Inner Mongolia ERDOS ResourcesLtd has lifted its dividend by approximately 29% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Has Inner Mongolia ERDOS ResourcesLtd got what it takes to maintain its dividend payments? It's good to see earnings per share growing and low cashflow payout ratio, although we're uncomfortable with Inner Mongolia ERDOS ResourcesLtd's paying out such a high percentage of its profit. In summary, while it has some positive characteristics, we're not inclined to race out and buy Inner Mongolia ERDOS ResourcesLtd today.

On that note, you'll want to research what risks Inner Mongolia ERDOS ResourcesLtd is facing. Every company has risks, and we've spotted 2 warning signs for Inner Mongolia ERDOS ResourcesLtd you should know about.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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