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 Luk Fook Holdings (International) Limited (HKG:590) is about to go ex-dividend in just four 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. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, Luk Fook Holdings (International) investors that purchase the stock on or after the 20th of August will not receive the dividend, which will be paid on the 4th of September.

The company's next dividend payment will be HK$0.64 per share. Last year, in total, the company distributed HK$1.36 to shareholders. Looking at the last 12 months of distributions, Luk Fook Holdings (International) has a trailing yield of approximately 9.4% on its current stock price of HK$14.54. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Luk Fook Holdings (International) paying out a modest 45% of its earnings. 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 54% of its free cash flow as dividends, within the usual range for most companies.

It's positive to see that Luk Fook Holdings (International)'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. This is why it's a relief to see Luk Fook Holdings (International) earnings per share are up 3.4% per annum over the last five years. 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.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Luk Fook Holdings (International) has lifted its dividend by approximately 0.6% a year on average.

The Bottom Line

From a dividend perspective, should investors buy or avoid Luk Fook Holdings (International)? Earnings per share have been growing at a steady rate, and Luk Fook Holdings (International) paid out less than half its profits and more than half its free cash flow as dividends over the last year. To summarise, Luk Fook Holdings (International) looks okay on this analysis, although it doesn't appear a stand-out opportunity.

So while Luk Fook Holdings (International) looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. For example - Luk Fook Holdings (International) 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.