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 Zhejiang Sanfer Electric Co., Ltd (SHSE:605336) is about to go ex-dividend in just three 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 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 Zhejiang Sanfer Electric's shares on or after the 16th of July, you won't be eligible to receive the dividend, when it is paid on the 16th of July.

The company's upcoming dividend is CN¥0.62 a share, following on from the last 12 months, when the company distributed a total of CN¥0.62 per share to shareholders. Looking at the last 12 months of distributions, Zhejiang Sanfer Electric has a trailing yield of approximately 5.4% on its current stock price of CN¥11.55. If you buy this business for its dividend, you should have an idea of whether Zhejiang Sanfer Electric's dividend is reliable and sustainable. As a result, readers should always check whether Zhejiang Sanfer Electric has been able to grow its dividends, or if the dividend might be cut.

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. Zhejiang Sanfer Electric paid out 67% of its earnings to investors last year, a normal payout level for most businesses. 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. It paid out 97% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

While Zhejiang Sanfer Electric'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 Zhejiang Sanfer Electric's ability to maintain its dividend.

Click here to see how much of its profit Zhejiang Sanfer Electric 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. So we're not too excited that Zhejiang Sanfer Electric's earnings are down 4.0% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, three years ago, Zhejiang Sanfer Electric has lifted its dividend by approximately 25% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

Final Takeaway

Should investors buy Zhejiang Sanfer Electric for the upcoming dividend? Zhejiang Sanfer Electric had an average payout ratio, but its free cash flow was lower and earnings per share have been declining. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.

With that being said, if you're still considering Zhejiang Sanfer Electric as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 1 warning sign for Zhejiang Sanfer Electric that we recommend you consider before investing in the business.

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