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 Jiangsu King's Luck Brewery Joint-Stock Co.,Ltd. (SHSE:603369) is about to go ex-dividend in just 4 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Meaning, you will need to purchase Jiangsu King's Luck Brewery Ltd's shares before the 12th of June to receive the dividend, which will be paid on the 12th of June.

The company's next dividend payment will be CN¥1.00 per share. Last year, in total, the company distributed CN¥1.00 to shareholders. Last year's total dividend payments show that Jiangsu King's Luck Brewery Ltd has a trailing yield of 1.9% on the current share price of CN¥51.72. If you buy this business for its dividend, you should have an idea of whether Jiangsu King's Luck Brewery Ltd's dividend is reliable and sustainable. So we need to investigate whether Jiangsu King's Luck Brewery Ltd can afford its dividend, and if the dividend could grow.

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. Fortunately Jiangsu King's Luck Brewery Ltd's payout ratio is modest, at just 37% of profit. 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. Over the past year it paid out 182% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Jiangsu King's Luck Brewery Ltd does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

While Jiangsu King's Luck Brewery Ltd's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Jiangsu King's Luck Brewery Ltd's ability to maintain its dividend.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Jiangsu King's Luck Brewery Ltd's earnings have been skyrocketing, up 24% per annum for the past five years. Earnings have been growing quickly, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past nine years, Jiangsu King's Luck Brewery Ltd has increased its dividend at approximately 23% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

The Bottom Line

Is Jiangsu King's Luck Brewery Ltd worth buying for its dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. In summary, while it has some positive characteristics, we're not inclined to race out and buy Jiangsu King's Luck Brewery Ltd today.

With that in mind, a critical part of thorough stock research is being aware of any risks that stock currently faces. We've identified 2 warning signs with Jiangsu King's Luck Brewery Ltd (at least 1 which is concerning), and understanding these should be part of your investment process.

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.