Four Seas Mercantile Holdings Limited (HKG:374) is about to trade 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 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 Four Seas Mercantile Holdings' shares before the 2nd of September in order to be eligible for the dividend, which will be paid on the 25th of September.

The company's upcoming dividend is HK$0.065 a share, following on from the last 12 months, when the company distributed a total of HK$0.095 per share to shareholders. Last year's total dividend payments show that Four Seas Mercantile Holdings has a trailing yield of 3.8% on the current share price of HK$2.50. 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 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. Four Seas Mercantile Holdings paid out 105% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 13% of its cash flow last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Four Seas Mercantile Holdings fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Four Seas Mercantile Holdings paid out over the last 12 months.

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. This is why it's a relief to see Four Seas Mercantile Holdings earnings per share are up 2.8% per annum over the last five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Four Seas Mercantile Holdings has delivered an average of 1.7% per year annual increase in its dividend, based on the past 10 years of dividend payments.

The Bottom Line

Is Four Seas Mercantile Holdings an attractive dividend stock, or better left on the shelf? Earnings per share have grown modestly, and last year Four Seas Mercantile Holdings paid out a low percentage of its cash flow. However, its dividend payments were not well covered by profits. Overall, it's hard to get excited about Four Seas Mercantile Holdings from a dividend perspective.

If you're not too concerned about Four Seas Mercantile Holdings's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. Case in point: We've spotted 2 warning signs for Four Seas Mercantile Holdings you should be aware of.

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.