Readers hoping to buy Chongqing Fuling Zhacai Group Co., Ltd. (SZSE:002507) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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 of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Chongqing Fuling Zhacai Group's shares before the 18th of June to receive the dividend, which will be paid on the 18th of June.

The company's next dividend payment will be CN¥0.30 per share, on the back of last year when the company paid a total of CN¥0.30 to shareholders. Based on the last year's worth of payments, Chongqing Fuling Zhacai Group has a trailing yield of 2.2% on the current stock price of CN¥13.37. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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. Chongqing Fuling Zhacai Group paid out a comfortable 41% of its profit last year. 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. Over the last year, it paid out more than three-quarters (79%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's positive to see that Chongqing Fuling Zhacai Group'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?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're encouraged by the steady growth at Chongqing Fuling Zhacai Group, with earnings per share up 2.3% on average over the last five years. A high payout ratio of 41% generally happens when a company can't find better uses for the cash. Combined with slim earnings growth in the past few years, Chongqing Fuling Zhacai Group could be signalling that its future growth prospects are thin.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, Chongqing Fuling Zhacai Group has lifted its dividend by approximately 26% a year on average. 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.

To Sum It Up

Is Chongqing Fuling Zhacai Group an attractive dividend stock, or better left on the shelf? Earnings per share growth has been modest, and it's interesting that Chongqing Fuling Zhacai Group 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, Chongqing Fuling Zhacai Group looks okay on this analysis, although it doesn't appear a stand-out opportunity.

So while Chongqing Fuling Zhacai Group looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. In terms of investment risks, we've identified 1 warning sign with Chongqing Fuling Zhacai Group and understanding them should be part of your investment process.

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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.