Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Newland Pharmaceutical Co., Ltd. (SZSE:301277) is about to trade ex-dividend in the next three days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. This means that investors who purchase Newland Pharmaceutical's shares on or after the 10th of May will not receive the dividend, which will be paid on the 10th of May.

The company's next dividend payment will be CN¥0.40 per share. Last year, in total, the company distributed CN¥0.33 to shareholders. Calculating the last year's worth of payments shows that Newland Pharmaceutical has a trailing yield of 1.7% on the current share price of CN¥19.88. If you buy this business for its dividend, you should have an idea of whether Newland Pharmaceutical's dividend is reliable and sustainable. So we need to investigate whether Newland Pharmaceutical can afford its dividend, and if the dividend could grow.

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. Newland Pharmaceutical paid out a comfortable 48% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 47% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Newland Pharmaceutical's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. It's encouraging to see Newland Pharmaceutical has grown its earnings rapidly, up 34% a year for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. Companies with growing earnings and low payout ratios are often the best long-term dividend stocks, as the company can both grow its earnings and increase the percentage of earnings that it pays out, essentially multiplying the dividend.

We'd also point out that Newland Pharmaceutical issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.

Given that Newland Pharmaceutical has only been paying a dividend for a year, there's not much of a past history to draw insight from.

The Bottom Line

From a dividend perspective, should investors buy or avoid Newland Pharmaceutical? We love that Newland Pharmaceutical is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. There's a lot to like about Newland Pharmaceutical, and we would prioritise taking a closer look at it.

While it's tempting to invest in Newland Pharmaceutical for the dividends alone, you should always be mindful of the risks involved. For example, we've found 1 warning sign for Newland Pharmaceutical that we recommend you consider before investing in the business.

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.