Kato (Hong Kong) Holdings Limited (HKG:2189) is about to trade ex-dividend in the next four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. This means that investors who purchase Kato (Hong Kong) Holdings' shares on or after the 4th of September will not receive the dividend, which will be paid on the 19th of September.

The company's next dividend payment will be HK$0.02 per share, on the back of last year when the company paid a total of HK$0.03 to shareholders. Based on the last year's worth of payments, Kato (Hong Kong) Holdings stock has a trailing yield of around 5.7% on the current share price of HK$0.53. If you buy this business for its dividend, you should have an idea of whether Kato (Hong Kong) Holdings's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Kato (Hong Kong) Holdings's payout ratio is modest, at just 47% of profit. A useful secondary check can be to evaluate whether Kato (Hong Kong) Holdings generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 30% of the free cash flow it generated, which is a comfortable payout ratio.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Kato (Hong Kong) Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Kato (Hong Kong) Holdings, with earnings per share up 4.9% on average over the last five years. Recent earnings growth has been limited. Yet there are several ways to grow the dividend, and one of them is simply that the company may choose to pay out more of its earnings as dividends.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Kato (Hong Kong) Holdings has seen its dividend decline 5.6% per annum on average over the past five years, which is not great to see. Kato (Hong Kong) Holdings is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

The Bottom Line

From a dividend perspective, should investors buy or avoid Kato (Hong Kong) Holdings? Earnings per share have been growing moderately, and Kato (Hong Kong) Holdings is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Kato (Hong Kong) Holdings is halfway there. It's a promising combination that should mark this company worthy of closer attention.

While it's tempting to invest in Kato (Hong Kong) Holdings for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 3 warning signs for Kato (Hong Kong) Holdings and you should be aware of them before buying any shares.

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.