Qinghai Huzhu TianYouDe Highland Barley Spirit Co., Ltd. (SZSE:002646) is about to trade ex-dividend in the next 4 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 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 Qinghai Huzhu TianYouDe Highland Barley Spirit's shares on or after the 25th of June, you won't be eligible to receive the dividend, when it is paid on the 25th of June.

The company's next dividend payment will be CN¥0.13 per share, on the back of last year when the company paid a total of CN¥0.13 to shareholders. Based on the last year's worth of payments, Qinghai Huzhu TianYouDe Highland Barley Spirit has a trailing yield of 1.2% on the current stock price of CN¥10.75. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Qinghai Huzhu TianYouDe Highland Barley Spirit has been able to grow its dividends, or if the dividend might be cut.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Qinghai Huzhu TianYouDe Highland Barley Spirit paid out 51% of its earnings to investors last year, a normal payout level for most businesses. 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. Thankfully its dividend payments took up just 36% of the free cash flow it generated, which is a comfortable payout ratio.

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 Qinghai Huzhu TianYouDe Highland Barley Spirit paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That explains why we're not overly excited about Qinghai Huzhu TianYouDe Highland Barley Spirit's flat earnings over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share. Earnings per share growth has been slim, and the company is already paying out a majority 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. Qinghai Huzhu TianYouDe Highland Barley Spirit has seen its dividend decline 8.0% per annum on average over the past 10 years, which is not great to see.

Final Takeaway

Is Qinghai Huzhu TianYouDe Highland Barley Spirit an attractive dividend stock, or better left on the shelf? It's unfortunate that earnings per share have not grown, and we'd note that Qinghai Huzhu TianYouDe Highland Barley Spirit is paying out lower percentage of its cashflow than its profit, but overall the dividend looks well covered by earnings. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Qinghai Huzhu TianYouDe Highland Barley Spirit's dividend merits.

While it's tempting to invest in Qinghai Huzhu TianYouDe Highland Barley Spirit for the dividends alone, you should always be mindful of the risks involved. Our analysis shows 1 warning sign for Qinghai Huzhu TianYouDe Highland Barley Spirit and you should be aware of this before buying any shares.

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.

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