China Zhenhua (Group) Science & Technology Co., Ltd (SZSE:000733) stock is about to trade ex-dividend in 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. 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 China Zhenhua (Group) Science & Technology's shares on or after the 28th of June will not receive the dividend, which will be paid on the 28th of June.

The company's upcoming dividend is CN¥1.114 a share, following on from the last 12 months, when the company distributed a total of CN¥1.11 per share to shareholders. Based on the last year's worth of payments, China Zhenhua (Group) Science & Technology stock has a trailing yield of around 2.5% on the current share price of CN¥45.12. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether China Zhenhua (Group) Science & Technology can afford its dividend, and if the dividend could grow.

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. China Zhenhua (Group) Science & Technology paid out a comfortable 29% 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. Over the last year it paid out 75% of its free cash flow as dividends, within the usual range for most companies.

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 the company's payout ratio, plus analyst estimates of its future dividends.

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 fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see China Zhenhua (Group) Science & Technology's earnings have been skyrocketing, up 42% per annum for the past five years.

China Zhenhua (Group) Science & Technology 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, China Zhenhua (Group) Science & Technology has lifted its dividend by approximately 39% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Should investors buy China Zhenhua (Group) Science & Technology for the upcoming dividend? Earnings per share have grown at a nice rate in recent times and over the last year, China Zhenhua (Group) Science & Technology paid out less than half its earnings and a bit over half its free cash flow. Overall we think this is an attractive combination and worthy of further research.

While it's tempting to invest in China Zhenhua (Group) Science & Technology for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 2 warning signs with China Zhenhua (Group) Science & Technology and understanding them should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com