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 Luzhou Laojiao Co.,Ltd (SZSE:000568) is about to go ex-dividend in just three 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 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 Luzhou LaojiaoLtd's shares before the 23rd of August to receive the dividend, which will be paid on the 23rd of August.

The company's upcoming dividend is CN¥5.400078 a share, following on from the last 12 months, when the company distributed a total of CN¥5.40 per share to shareholders. Calculating the last year's worth of payments shows that Luzhou LaojiaoLtd has a trailing yield of 4.3% on the current share price of CN¥124.78. If you buy this business for its dividend, you should have an idea of whether Luzhou LaojiaoLtd's dividend is reliable and sustainable. As a result, readers should always check whether Luzhou LaojiaoLtd has been able to grow its dividends, or if the dividend might be cut.

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. Luzhou LaojiaoLtd is paying out an acceptable 56% of its profit, a common payout level among most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. It paid out more than half (54%) of its free cash flow in the past year, which is within an average range for most companies.

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 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 business enters a downturn and the dividend is cut, the company could see its value fall precipitously. It's encouraging to see Luzhou LaojiaoLtd has grown its earnings rapidly, up 32% a year for the past five years. The current payout ratio suggests a good balance between rewarding shareholders with dividends, and reinvesting in growth. With a reasonable payout ratio, profits being reinvested, and some earnings growth, Luzhou LaojiaoLtd could have strong prospects for future increases to the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Luzhou LaojiaoLtd has delivered 16% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Has Luzhou LaojiaoLtd got what it takes to maintain its dividend payments? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Luzhou LaojiaoLtd's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 56% and 54% respectively. Overall we're not hugely bearish on the stock, but there are likely better dividend investments out there.

In light of that, while Luzhou LaojiaoLtd has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for Luzhou LaojiaoLtd and you should be aware of it before buying any shares.

A common investing mistake is buying the first interesting stock you see. Here you can find a full list of high-yield 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.