Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Ningbo Huaxiang Electronic Co., Ltd. (SZSE:002048) is about to trade ex-dividend in the next 3 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Ningbo Huaxiang Electronic's shares before the 7th of June in order to be eligible for the dividend, which will be paid on the 7th of June.

The company's next dividend payment will be CN¥0.632 per share, on the back of last year when the company paid a total of CN¥0.63 to shareholders. Looking at the last 12 months of distributions, Ningbo Huaxiang Electronic has a trailing yield of approximately 4.3% on its current stock price of CN¥14.54. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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. Ningbo Huaxiang Electronic paid out a comfortable 49% of its profit last year. A useful secondary check can be to evaluate whether Ningbo Huaxiang Electronic generated enough free cash flow to afford its dividend. Over the last year it paid out 58% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Ningbo Huaxiang Electronic'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?

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. This is why it's a relief to see Ningbo Huaxiang Electronic earnings per share are up 2.3% per annum over the last five years. Earnings growth has been slim and the company is paying out more than half 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.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Ningbo Huaxiang Electronic has delivered an average of 29% per year annual increase in its dividend, based on the past 10 years of dividend payments. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

The Bottom Line

From a dividend perspective, should investors buy or avoid Ningbo Huaxiang Electronic? Earnings per share growth has been modest, and it's interesting that Ningbo Huaxiang Electronic is paying out less than half of its earnings and more than half its cash flow to shareholders in the form of dividends. To summarise, Ningbo Huaxiang Electronic looks okay on this analysis, although it doesn't appear a stand-out opportunity.

So while Ningbo Huaxiang Electronic looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. Case in point: We've spotted 1 warning sign for Ningbo Huaxiang Electronic you should be aware of.

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.