Readers hoping to buy Vtech Holdings Limited (HKG:303) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. 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. Therefore, if you purchase Vtech Holdings' shares on or after the 5th of December, you won't be eligible to receive the dividend, when it is paid on the 18th of December.

The company's upcoming dividend is US$0.17 a share, following on from the last 12 months, when the company distributed a total of US$0.65 per share to shareholders. Based on the last year's worth of payments, Vtech Holdings has a trailing yield of 9.5% on the current stock price of HK$53.15. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year Vtech Holdings paid out 102% of its profits as dividends to shareholders, suggesting the dividend is not well covered by earnings. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Fortunately, it paid out only 46% of its free cash flow in the past year.

It's good to see that while Vtech Holdings'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. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Vtech Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. 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 not enthused to see that Vtech Holdings's earnings per share have remained effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Vtech Holdings's dividend payments per share have declined at 2.1% per year on average over the past 10 years, which is uninspiring.

To Sum It Up

From a dividend perspective, should investors buy or avoid Vtech Holdings? Earnings per share have been effectively flat, which is a bit of a concern given the company is paying out 102% of its profit as dividends, which we feel is uncomfortably high. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Vtech Holdings.

Although, if you're still interested in Vtech Holdings and want to know more, you'll find it very useful to know what risks this stock faces. For instance, we've identified 2 warning signs for Vtech Holdings (1 is a bit unpleasant) you should be aware of.

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.