Readers hoping to buy Chen Hsong Holdings Limited (HKG:57) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. Meaning, you will need to purchase Chen Hsong Holdings' shares before the 3rd of September to receive the dividend, which will be paid on the 23rd of September.

The company's next dividend payment will be HK$0.05 per share. Last year, in total, the company distributed HK$0.08 to shareholders. Last year's total dividend payments show that Chen Hsong Holdings has a trailing yield of 5.5% on the current share price of HK$1.46. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Chen Hsong Holdings paid out 50% of its earnings to investors last year, a normal payout level for most businesses. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 24% of its cash flow last year.

It's positive to see that Chen Hsong 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 Chen Hsong Holdings 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. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Chen Hsong Holdings, with earnings per share up 2.2% on average over the last five years. Earnings per share growth has been slim, and the company is already paying out a majority 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. Chen Hsong Holdings's dividend payments per share have declined at 1.2% per year on average over the past 10 years, which is uninspiring.

The Bottom Line

Is Chen Hsong Holdings an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest and Chen Hsong Holdings paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. To summarise, Chen Hsong Holdings looks okay on this analysis, although it doesn't appear a stand-out opportunity.

In light of that, while Chen Hsong Holdings has an appealing dividend, it's worth knowing the risks involved with this stock. Every company has risks, and we've spotted 1 warning sign for Chen Hsong Holdings you should know about.

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.