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 Yip's Chemical Holdings Limited (HKG:408) is about to go ex-dividend in just 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Therefore, if you purchase Yip's Chemical Holdings' shares on or after the 4th of September, you won't be eligible to receive the dividend, when it is paid on the 9th of October.

The company's next dividend payment will be HK$0.03 per share, on the back of last year when the company paid a total of HK$0.12 to shareholders. Last year's total dividend payments show that Yip's Chemical Holdings has a trailing yield of 8.1% on the current share price of HK$1.49. If you buy this business for its dividend, you should have an idea of whether Yip's Chemical Holdings's dividend is reliable and sustainable. So we need to investigate whether Yip's Chemical Holdings can afford its dividend, and if the dividend could grow.

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. Yip's Chemical Holdings paid out 71% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Yip's Chemical Holdings generated enough free cash flow to afford its dividend. It paid out 82% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's positive to see that Yip's Chemical Holdings'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 how much of its profit Yip's Chemical Holdings paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're discomforted by Yip's Chemical Holdings's 11% per annum decline in earnings in the past five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Yip's Chemical Holdings has seen its dividend decline 7.1% per annum on average over the past 10 years, which is not great to see. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.

The Bottom Line

Is Yip's Chemical Holdings worth buying for its dividend? While earnings per share are shrinking, it's encouraging to see that at least Yip's Chemical Holdings's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. Bottom line: Yip's Chemical Holdings has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of Yip's Chemical Holdings don't faze you, it's worth being mindful of the risks involved with this business. Every company has risks, and we've spotted 2 warning signs for Yip's Chemical Holdings (of which 1 doesn't sit too well with us!) you should know about.

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