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 ChangZhou KAIDI Electrical Inc. (SHSE:605288) is about to go ex-dividend in just 2 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. 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. Meaning, you will need to purchase ChangZhou KAIDI Electrical's shares before the 14th of June to receive the dividend, which will be paid on the 14th of June.

The company's next dividend payment will be CN¥0.46 per share, on the back of last year when the company paid a total of CN¥0.46 to shareholders. Looking at the last 12 months of distributions, ChangZhou KAIDI Electrical has a trailing yield of approximately 1.4% on its current stock price of CN¥32.15. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. ChangZhou KAIDI Electrical paid out a comfortable 30% of its profit last year. A useful secondary check can be to evaluate whether ChangZhou KAIDI Electrical generated enough free cash flow to afford its dividend. It paid out 9.6% of its free cash flow as dividends last year, which is conservatively low.

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 ChangZhou KAIDI Electrical paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're discomforted by ChangZhou KAIDI Electrical's 21% 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. ChangZhou KAIDI Electrical has seen its dividend decline 14% 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.

To Sum It Up

Is ChangZhou KAIDI Electrical worth buying for its dividend? ChangZhou KAIDI Electrical has comfortably low cash and profit payout ratios, which may mean the dividend is sustainable even in the face of a sharp decline in earnings per share. Still, we consider declining earnings to be a warning sign. Overall, it's hard to get excited about ChangZhou KAIDI Electrical from a dividend perspective.

So while ChangZhou KAIDI Electrical looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. To that end, you should learn about the 2 warning signs we've spotted with ChangZhou KAIDI Electrical (including 1 which can't be ignored).

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.