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 Inner Mongolia Xinhua Distribution Group Co.,Ltd. (SHSE:603230) is about to go ex-dividend in just 4 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 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 Inner Mongolia Xinhua Distribution GroupLtd's shares before the 26th of June in order to receive the dividend, which the company will pay on the 26th of June.

The company's next dividend payment will be CN¥0.45 per share, on the back of last year when the company paid a total of CN¥0.45 to shareholders. Calculating the last year's worth of payments shows that Inner Mongolia Xinhua Distribution GroupLtd has a trailing yield of 3.7% on the current share price of CN¥12.07. If you buy this business for its dividend, you should have an idea of whether Inner Mongolia Xinhua Distribution GroupLtd's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Inner Mongolia Xinhua Distribution GroupLtd is paying out an acceptable 53% of its profit, a common payout level among most companies. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Luckily it paid out just 16% of its free cash flow last year.

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 Inner Mongolia Xinhua Distribution GroupLtd paid out over the last 12 months.

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. With that in mind, we're encouraged by the steady growth at Inner Mongolia Xinhua Distribution GroupLtd, with earnings per share up 7.6% on average over the last five years. Decent historical earnings per share growth suggests Inner Mongolia Xinhua Distribution GroupLtd has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Inner Mongolia Xinhua Distribution GroupLtd has delivered an average of 163% per year annual increase in its dividend, based on the past two years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Is Inner Mongolia Xinhua Distribution GroupLtd worth buying for its dividend? Earnings per share growth has been modest and Inner Mongolia Xinhua Distribution GroupLtd paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. In summary, it's hard to get excited about Inner Mongolia Xinhua Distribution GroupLtd from a dividend perspective.

While it's tempting to invest in Inner Mongolia Xinhua Distribution GroupLtd for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 1 warning sign for Inner Mongolia Xinhua Distribution GroupLtd 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com