Readers hoping to buy Xiamen Solex High-tech Industries Co., Ltd. (SHSE:603992) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. 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. 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. This means that investors who purchase Xiamen Solex High-tech Industries' shares on or after the 5th of September will not receive the dividend, which will be paid on the 5th of September.

The company's next dividend payment will be CN¥0.27 per share. Last year, in total, the company distributed CN¥0.44 to shareholders. Based on the last year's worth of payments, Xiamen Solex High-tech Industries stock has a trailing yield of around 2.6% on the current share price of CN¥16.91. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

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. Xiamen Solex High-tech Industries paid out 57% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Xiamen Solex High-tech Industries generated enough free cash flow to afford its dividend. Over the last year it paid out 55% of its free cash flow as dividends, within the usual 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 earnings fall far enough, the company could be forced to cut its dividend. For this reason, we're glad to see Xiamen Solex High-tech Industries's earnings per share have risen 11% per annum over the last five years. Xiamen Solex High-tech Industries is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Xiamen Solex High-tech Industries has delivered an average of 26% per year annual increase in its dividend, based on the past four years of dividend payments. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Final Takeaway

Has Xiamen Solex High-tech Industries got what it takes to maintain its dividend payments? It's good to see earnings are growing, since all of the best dividend stocks grow their earnings meaningfully over the long run. However, we'd also note that Xiamen Solex High-tech Industries is paying out more than half of its earnings and cash flow as profits, which could limit the dividend growth if earnings growth slows. All things considered, we are not particularly enthused about Xiamen Solex High-tech Industries from a dividend perspective.

So while Xiamen Solex High-tech Industries looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. To help with this, we've discovered 1 warning sign for Xiamen Solex High-tech Industries that you should be aware of before investing in their 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.