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 Shanghai Mechanical & Electrical Industry Co.,Ltd. (SHSE:600835) is about to go ex-dividend in just two 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Meaning, you will need to purchase Shanghai Mechanical & Electrical IndustryLtd's shares before the 13th of July to receive the dividend, which will be paid on the 13th of July.

The company's next dividend payment will be CN¥0.29 per share. Last year, in total, the company distributed CN¥0.29 to shareholders. Looking at the last 12 months of distributions, Shanghai Mechanical & Electrical IndustryLtd has a trailing yield of approximately 2.2% on its current stock price of CN¥13.41. 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 Shanghai Mechanical & Electrical IndustryLtd has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Shanghai Mechanical & Electrical IndustryLtd

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Fortunately Shanghai Mechanical & Electrical IndustryLtd's payout ratio is modest, at just 41% of profit. A useful secondary check can be to evaluate whether Shanghai Mechanical & Electrical IndustryLtd generated enough free cash flow to afford its dividend. It paid out more than half (62%) of its free cash flow in the past year, which is within an average range for most companies.

It's positive to see that Shanghai Mechanical & Electrical IndustryLtd'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 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. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by Shanghai Mechanical & Electrical IndustryLtd's 13% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Shanghai Mechanical & Electrical IndustryLtd's dividend payments are effectively flat on where they were 10 years ago. If a company's dividend stays flat while earnings are in decline, this is typically a sign that it is paying out a larger percentage of its earnings. This can become unsustainable if earnings fall far enough.

To Sum It Up

Is Shanghai Mechanical & Electrical IndustryLtd worth buying for its dividend? Its earnings per share have been declining meaningfully, although it is paying out less than half its income and more than half its cash flow as dividends. Neither payout ratio appears an immediate concern, but we're concerned about the earnings. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Shanghai Mechanical & Electrical IndustryLtd's dividend merits.

So if you want to do more digging on Shanghai Mechanical & Electrical IndustryLtd, you'll find it worthwhile knowing the risks that this stock faces. For example, we've found 2 warning signs for Shanghai Mechanical & Electrical IndustryLtd that we recommend you consider before investing in the business.

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.