Pak Fah Yeow International Limited (HKG:239) stock is about to trade ex-dividend in 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 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. This means that investors who purchase Pak Fah Yeow International's shares on or after the 27th of September will not receive the dividend, which will be paid on the 6th of December.

The company's upcoming dividend is HK$0.095 a share, following on from the last 12 months, when the company distributed a total of HK$0.21 per share to shareholders. Based on the last year's worth of payments, Pak Fah Yeow International has a trailing yield of 8.3% on the current stock price of HK$2.58. If you buy this business for its dividend, you should have an idea of whether Pak Fah Yeow International's dividend is reliable and sustainable. As a result, readers should always check whether Pak Fah Yeow International has been able to grow its dividends, or if the dividend might be cut.

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. Pak Fah Yeow International is paying out just 22% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. 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. Luckily it paid out just 12% of its free cash flow last year.

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 how much of its profit Pak Fah Yeow International paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. That's why it's comforting to see Pak Fah Yeow International's earnings have been skyrocketing, up 21% per annum for the past five years. With earnings per share growing rapidly and the company sensibly reinvesting almost all of its profits within the business, Pak Fah Yeow International looks like a promising growth company.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Pak Fah Yeow International has delivered 3.4% dividend growth per year on average over the past 10 years. Earnings per share have been growing much quicker than dividends, potentially because Pak Fah Yeow International is keeping back more of its profits to grow the business.

The Bottom Line

Should investors buy Pak Fah Yeow International for the upcoming dividend? It's great that Pak Fah Yeow International is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. It's disappointing to see the dividend has been cut at least once in the past, but as things stand now, the low payout ratio suggests a conservative approach to dividends, which we like. There's a lot to like about Pak Fah Yeow International, and we would prioritise taking a closer look at it.

In light of that, while Pak Fah Yeow International has an appealing dividend, it's worth knowing the risks involved with this stock. Every company has risks, and we've spotted 1 warning sign for Pak Fah Yeow International 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.

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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.