It looks like Foshan Electrical and Lighting Co.,Ltd (SZSE:000541) is about to go ex-dividend in the next four days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Thus, you can purchase Foshan Electrical and LightingLtd's shares before the 8th of July in order to receive the dividend, which the company will pay on the 8th of July.

The company's next dividend payment will be CN¥0.12 per share, on the back of last year when the company paid a total of CN¥0.12 to shareholders. Calculating the last year's worth of payments shows that Foshan Electrical and LightingLtd has a trailing yield of 2.5% on the current share price of CN¥4.89. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Foshan Electrical and LightingLtd has been able to grow its dividends, or if the dividend might be cut.

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. Foshan Electrical and LightingLtd is paying out an acceptable 55% of its profit, a common payout level among most companies. 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. The good news is it paid out just 21% of its free cash flow in the last year.

It's positive to see that Foshan Electrical and LightingLtd'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 the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Readers will understand then, why we're concerned to see Foshan Electrical and LightingLtd's earnings per share have dropped 5.8% a year over the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Foshan Electrical and LightingLtd 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. Trying to grow the dividend while issuing large amounts of new shares reminds us of the ancient Greek tale of Sisyphus - perpetually pushing a boulder uphill.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Foshan Electrical and LightingLtd has increased its dividend at approximately 0.7% a year on average.

The Bottom Line

Is Foshan Electrical and LightingLtd an attractive dividend stock, or better left on the shelf? We're not enthused by the declining earnings per share, although at least the company's payout ratio is within a reasonable range, meaning it may not be at imminent risk of a dividend cut. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

If you're not too concerned about Foshan Electrical and LightingLtd's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. For example, we've found 3 warning signs for Foshan Electrical and LightingLtd that we recommend you consider before investing in the business.

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.

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