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 Fujian South Highway Machinery Co., Ltd. (SHSE:603280) is about to go ex-dividend in just 3 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, Fujian South Highway Machinery investors that purchase the stock on or after the 4th of June will not receive the dividend, which will be paid on the 4th of June.

The company's next dividend payment will be CN¥0.34 per share. Last year, in total, the company distributed CN¥0.34 to shareholders. Last year's total dividend payments show that Fujian South Highway Machinery has a trailing yield of 1.6% on the current share price of CN¥20.64. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Fortunately Fujian South Highway Machinery's payout ratio is modest, at just 30% of profit. 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. Dividends consumed 60% of the company's free cash flow last year, which is within a normal range for most dividend-paying organisations.

It's positive to see that Fujian South Highway Machinery'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 Fujian South Highway Machinery 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. Fujian South Highway Machinery's earnings per share have fallen at approximately 14% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Fujian South Highway Machinery also issued more than 5% of its market cap in new stock during the past year, which we feel is likely to hurt its dividend prospects in the long run. It's hard to grow dividends per share when a company keeps creating new shares.

Unfortunately Fujian South Highway Machinery has only been paying a dividend for a year or so, so there's not much of a history to draw insight from.

Final Takeaway

Is Fujian South Highway Machinery an attractive dividend stock, or better left on the shelf? Earnings per share have fallen significantly, although at least Fujian South Highway Machinery paid out less than half of its profits and free cash flow over the last year, leaving some margin of safety. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

However if you're still interested in Fujian South Highway Machinery as a potential investment, you should definitely consider some of the risks involved with Fujian South Highway Machinery. Every company has risks, and we've spotted 2 warning signs for Fujian South Highway Machinery (of which 1 is a bit concerning!) you should know about.

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.