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 Hang Chi Holdings Limited (HKG:8405) is about to go ex-dividend in just three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order to receive a dividend. The ex-dividend date is important because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Thus, you can purchase Hang Chi Holdings' shares before the 17th of May in order to receive the dividend, which the company will pay on the 6th of June.

The company's next dividend payment will be HK$0.04 per share. Last year, in total, the company distributed HK$0.04 to shareholders. Based on the last year's worth of payments, Hang Chi Holdings stock has a trailing yield of around 5.7% on the current share price of HK$0.70. 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 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. Hang Chi Holdings 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 Hang Chi Holdings generated enough free cash flow to afford its dividend. Over the last year it paid out 58% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Hang Chi Holdings'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 Hang Chi Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Hang Chi Holdings's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings growth has been slim and the company is paying out more than half of its earnings. While there is some room to both increase the payout ratio and reinvest in the business, generally the higher a payout ratio goes, the lower a company's prospects for future growth.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past six years, Hang Chi Holdings has increased its dividend at approximately 4.9% a year on average.

To Sum It Up

From a dividend perspective, should investors buy or avoid Hang Chi Holdings? Hang Chi Holdings has struggled to grow its earnings per share, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don't appear unsustainable. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Hang Chi Holdings's dividend merits.

With that being said, if dividends aren't your biggest concern with Hang Chi Holdings, you should know about the other risks facing this business. Case in point: We've spotted 3 warning signs for Hang Chi Holdings you should be aware of.

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.