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 Zhejiang Tengen Electrics Co.,Ltd. (SHSE:605066) is about to go ex-dividend in just 3 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Therefore, if you purchase Zhejiang Tengen ElectricsLtd's shares on or after the 7th of June, you won't be eligible to receive the dividend, when it is paid on the 7th of June.

The company's next dividend payment will be CN¥0.25 per share. Last year, in total, the company distributed CN¥0.25 to shareholders. Last year's total dividend payments show that Zhejiang Tengen ElectricsLtd has a trailing yield of 3.3% on the current share price of CN¥7.50. If you buy this business for its dividend, you should have an idea of whether Zhejiang Tengen ElectricsLtd's dividend is reliable and sustainable. As a result, readers should always check whether Zhejiang Tengen ElectricsLtd has been able to grow its dividends, or if the dividend might be cut.

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. Its dividend payout ratio is 75% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth. We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether Zhejiang Tengen ElectricsLtd generated enough free cash flow to afford its dividend. Fortunately, it paid out only 33% of its free cash flow in the past year.

It's positive to see that Zhejiang Tengen ElectricsLtd'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 Zhejiang Tengen ElectricsLtd paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. So we're not too excited that Zhejiang Tengen ElectricsLtd's earnings are down 4.4% a year over the past five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Zhejiang Tengen ElectricsLtd has seen its dividend decline 5.9% per annum on average over the past three years, which is not great to see. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.

The Bottom Line

Is Zhejiang Tengen ElectricsLtd worth buying for its dividend? The payout ratios are within a reasonable range, implying the dividend may be sustainable. Declining earnings are a serious concern, however, and could pose a threat to the dividend in future. In summary, while it has some positive characteristics, we're not inclined to race out and buy Zhejiang Tengen ElectricsLtd today.

If you're not too concerned about Zhejiang Tengen ElectricsLtd's ability to pay dividends, you should still be mindful of some of the other risks that this business faces. We've identified 2 warning signs with Zhejiang Tengen ElectricsLtd (at least 1 which shouldn't be ignored), and understanding these should be part of your investment process.

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.