It looks like Sichuan Changhong Electric Co.,Ltd. (SHSE:600839) is about to go ex-dividend in the next three days. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company's books in order 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. Accordingly, Sichuan Changhong ElectricLtd investors that purchase the stock on or after the 27th of September will not receive the dividend, which will be paid on the 27th of September.

The company's next dividend payment will be CN¥0.05 per share, on the back of last year when the company paid a total of CN¥0.10 to shareholders. Calculating the last year's worth of payments shows that Sichuan Changhong ElectricLtd has a trailing yield of 2.0% on the current share price of CN¥5.05. If you buy this business for its dividend, you should have an idea of whether Sichuan Changhong ElectricLtd's dividend is reliable and sustainable. So we need to check whether the dividend payments are covered, and if earnings are growing.

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Sichuan Changhong ElectricLtd paid out a comfortable 30% of its profit last year. 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. It paid out 95% of its free cash flow in the form of dividends last year, which is outside the comfort zone for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want to look more closely here.

While Sichuan Changhong ElectricLtd's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Cash is king, as they say, and were Sichuan Changhong ElectricLtd to repeatedly pay dividends that aren't well covered by cashflow, we would consider this a warning sign.

Click here to see how much of its profit Sichuan Changhong ElectricLtd paid out over the last 12 months.

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 Sichuan Changhong ElectricLtd's earnings per share have risen 19% per annum over the last five years. Earnings have been growing at a decent rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, Sichuan Changhong ElectricLtd has lifted its dividend by approximately 17% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Should investors buy Sichuan Changhong ElectricLtd for the upcoming dividend? We're glad to see the company has been improving its earnings per share while also paying out a low percentage of income. However, it's not great to see it paying out what we see as an uncomfortably high percentage of its cash flow. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we're not all that optimistic on its dividend prospects.

In light of that, while Sichuan Changhong ElectricLtd has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 3 warning signs for Sichuan Changhong ElectricLtd and you should be aware of them before buying any shares.

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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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.