It looks like Jiangsu Sunshine Co., Ltd. (SHSE:600220) is about to go ex-dividend in the next couple of days. 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. 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 Jiangsu Sunshine's shares before the 20th of July to receive the dividend, which will be paid on the 20th of July.

The company's next dividend payment will be CN¥0.02 per share, on the back of last year when the company paid a total of CN¥0.02 to shareholders. Last year's total dividend payments show that Jiangsu Sunshine has a trailing yield of 0.6% on the current share price of CN¥3.09. 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 Jiangsu Sunshine has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for Jiangsu Sunshine

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Jiangsu Sunshine is paying out just 20% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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 22% of its 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 Jiangsu Sunshine paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. 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 Jiangsu Sunshine, with earnings per share up 3.1% on average over the last five years. Jiangsu Sunshine is retaining more than three-quarters of its earnings and has a history of generating some growth in earnings. We think this is a reasonable combination.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Jiangsu Sunshine has seen its dividend decline 13% per annum on average over the past three years, which is not great to see. Jiangsu Sunshine is a rare case where dividends have been decreasing at the same time as earnings per share have been improving. It's unusual to see, and could point to unstable conditions in the core business, or more rarely an intensified focus on reinvesting profits.

To Sum It Up

From a dividend perspective, should investors buy or avoid Jiangsu Sunshine? Earnings per share have been growing moderately, and Jiangsu Sunshine is paying out less than half its earnings and cash flow as dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings growing faster, but Jiangsu Sunshine is being conservative with its dividend payouts and could still perform reasonably over the long run. There's a lot to like about Jiangsu Sunshine, and we would prioritise taking a closer look at it.

In light of that, while Jiangsu Sunshine has an appealing dividend, it's worth knowing the risks involved with this stock. Every company has risks, and we've spotted 4 warning signs for Jiangsu Sunshine (of which 2 don't sit too well with us!) you should know about.

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.