Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Shenzhen Ridge Engineering Consulting Co., Ltd. (SZSE:300977) is about to trade ex-dividend in the next 2 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled 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. Therefore, if you purchase Shenzhen Ridge Engineering Consulting's shares on or after the 30th of May, you won't be eligible to receive the dividend, when it is paid on the 30th of May.

The company's upcoming dividend is CN¥0.22 a share, following on from the last 12 months, when the company distributed a total of CN¥0.22 per share to shareholders. Based on the last year's worth of payments, Shenzhen Ridge Engineering Consulting has a trailing yield of 1.4% on the current stock price of CN¥15.65. 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 Shenzhen Ridge Engineering Consulting has been able to grow its dividends, or if the dividend might be cut.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Shenzhen Ridge Engineering Consulting paid out 93% of its earnings, which is more than we're comfortable with, unless there are mitigating circumstances. A useful secondary check can be to evaluate whether Shenzhen Ridge Engineering Consulting generated enough free cash flow to afford its dividend. It paid out 12% of its free cash flow as dividends last year, which is conservatively low.

It's good to see that while Shenzhen Ridge Engineering Consulting's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if the company continues paying out such a high percentage of its profits, the dividend could be at risk if business turns sour.

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Shenzhen Ridge Engineering Consulting's earnings have collapsed faster than Wile E Coyote's schemes to trap the Road Runner; down a tremendous 39% a year over the past five years.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Shenzhen Ridge Engineering Consulting has seen its dividend decline 5.9% per annum on average over the past three years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

Final Takeaway

Should investors buy Shenzhen Ridge Engineering Consulting for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 93% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in Shenzhen Ridge Engineering Consulting's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Shenzhen Ridge Engineering Consulting.

Although, if you're still interested in Shenzhen Ridge Engineering Consulting and want to know more, you'll find it very useful to know what risks this stock faces. Our analysis shows 2 warning signs for Shenzhen Ridge Engineering Consulting and you should be aware of these before buying any shares.

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.