It looks like Avary Holding(Shenzhen)Co., Limited (SZSE:002938) is about to go ex-dividend in the next three 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. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Therefore, if you purchase Avary Holding(Shenzhen)Co's shares on or after the 13th of June, you won't be eligible to receive the dividend, when it is paid on the 13th of June.

The company's next dividend payment will be CN¥0.50 per share. Last year, in total, the company distributed CN¥0.50 to shareholders. Last year's total dividend payments show that Avary Holding(Shenzhen)Co has a trailing yield of 1.6% on the current share price of CN¥30.74. 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 investigate whether Avary Holding(Shenzhen)Co can afford its dividend, and if the dividend could grow.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Avary Holding(Shenzhen)Co paid out a comfortable 34% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 43% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that Avary Holding(Shenzhen)Co'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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're encouraged by the steady growth at Avary Holding(Shenzhen)Co, with earnings per share up 2.3% on average over the last five years. Earnings per share growth in recent times has not been a standout. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Avary Holding(Shenzhen)Co's dividend payments are broadly unchanged compared to where they were five years ago.

To Sum It Up

Has Avary Holding(Shenzhen)Co got what it takes to maintain its dividend payments? Earnings per share have been growing moderately, and Avary Holding(Shenzhen)Co 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 Avary Holding(Shenzhen)Co is being conservative with its dividend payouts and could still perform reasonably over the long run. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while Avary Holding(Shenzhen)Co has an appealing dividend, it's worth knowing the risks involved with this stock. For example - Avary Holding(Shenzhen)Co has 1 warning sign we think 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.