Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Fujian Yuanxiang New Materials Co.,Ltd (SZSE:301300) is about to trade ex-dividend in the next 2 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. In other words, investors can purchase Fujian Yuanxiang New MaterialsLtd's shares before the 5th of June in order to be eligible for the dividend, which will be paid on the 5th of June.

The company's next dividend payment will be CN¥0.40 per share, and in the last 12 months, the company paid a total of CN¥0.40 per share. Based on the last year's worth of payments, Fujian Yuanxiang New MaterialsLtd has a trailing yield of 1.7% on the current stock price of CN¥23.87. If you buy this business for its dividend, you should have an idea of whether Fujian Yuanxiang New MaterialsLtd's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are 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. Fujian Yuanxiang New MaterialsLtd paid out 68% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Fujian Yuanxiang New MaterialsLtd generated enough free cash flow to afford its dividend. Fujian Yuanxiang New MaterialsLtd paid out more free cash flow than it generated - 114%, to be precise - last year, which we think is concerningly high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Fujian Yuanxiang New MaterialsLtd does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Fujian Yuanxiang New MaterialsLtd'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. Cash is king, as they say, and were Fujian Yuanxiang New MaterialsLtd to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Fujian Yuanxiang New MaterialsLtd 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. Readers will understand then, why we're concerned to see Fujian Yuanxiang New MaterialsLtd's earnings per share have dropped 11% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Fujian Yuanxiang New MaterialsLtd's dividend payments are effectively flat on where they were two years ago. When earnings are declining yet the dividends are flat, typically the company is either paying out a higher portion of its earnings, or paying out of cash or debt on the balance sheet, neither of which is ideal.

The Bottom Line

Has Fujian Yuanxiang New MaterialsLtd got what it takes to maintain its dividend payments? It's definitely not great to see earnings per share shrinking. The company paid out an acceptable percentage of its income, but an uncomfortably high percentage of its cash flow over the past year. 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 in mind though, if the poor dividend characteristics of Fujian Yuanxiang New MaterialsLtd don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 2 warning signs for Fujian Yuanxiang New MaterialsLtd 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.