Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Wuxi Hongsheng Heat Exchanger Manufacturing Co., Ltd. (SHSE:603090) is about to trade ex-dividend in the next two 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. Accordingly, Wuxi Hongsheng Heat Exchanger Manufacturing investors that purchase the stock on or after the 16th of May will not receive the dividend, which will be paid on the 16th of May.

The company's next dividend payment will be CN¥0.30 per share. Last year, in total, the company distributed CN¥0.30 to shareholders. Based on the last year's worth of payments, Wuxi Hongsheng Heat Exchanger Manufacturing stock has a trailing yield of around 1.4% on the current share price of CN¥21.98. If you buy this business for its dividend, you should have an idea of whether Wuxi Hongsheng Heat Exchanger Manufacturing's dividend is reliable and sustainable. So we need to investigate whether Wuxi Hongsheng Heat Exchanger Manufacturing can afford its dividend, and if the dividend could grow.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Wuxi Hongsheng Heat Exchanger Manufacturing paid out more than half (56%) of its earnings last year, which is a regular payout ratio for most companies. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Thankfully its dividend payments took up just 38% of the free cash flow it generated, which is a comfortable payout ratio.

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 how much of its profit Wuxi Hongsheng Heat Exchanger Manufacturing 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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. For this reason, we're glad to see Wuxi Hongsheng Heat Exchanger Manufacturing's earnings per share have risen 10% per annum over the last five years. Wuxi Hongsheng Heat Exchanger Manufacturing is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Wuxi Hongsheng Heat Exchanger Manufacturing has delivered an average of 6.0% per year annual increase in its dividend, based on the past seven years of dividend payments. It's good to see both earnings and the dividend have improved - although the former has been rising much quicker than the latter, possibly due to the company reinvesting more of its profits in growth.

Final Takeaway

From a dividend perspective, should investors buy or avoid Wuxi Hongsheng Heat Exchanger Manufacturing? We like Wuxi Hongsheng Heat Exchanger Manufacturing's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while Wuxi Hongsheng Heat Exchanger Manufacturing has an appealing dividend, it's worth knowing the risks involved with this stock. For example - Wuxi Hongsheng Heat Exchanger Manufacturing has 1 warning sign we think 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.