Ten Pao Group Holdings Limited (HKG:1979) is about to trade ex-dividend in the next 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 because any transaction on a stock needs to have been settled before the record date in order to be eligible for a dividend. Meaning, you will need to purchase Ten Pao Group Holdings' shares before the 4th of October to receive the dividend, which will be paid on the 25th of October.

The company's next dividend payment will be HK$0.052 per share, and in the last 12 months, the company paid a total of HK$0.15 per share. Last year's total dividend payments show that Ten Pao Group Holdings has a trailing yield of 9.8% on the current share price of HK$1.51. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Ten Pao Group Holdings can afford its dividend, and if the dividend could grow.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. That's why it's good to see Ten Pao Group Holdings paying out a modest 41% of its earnings. A useful secondary check can be to evaluate whether Ten Pao Group Holdings generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 36% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that Ten Pao Group 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 Ten Pao Group Holdings 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 earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Ten Pao Group Holdings's earnings have been skyrocketing, up 45% per annum for the past five years. Ten Pao Group Holdings is paying out less than half its earnings and cash flow, while simultaneously growing earnings per share at a rapid clip. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, nine years ago, Ten Pao Group Holdings has lifted its dividend by approximately 25% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.

To Sum It Up

Is Ten Pao Group Holdings worth buying for its dividend? Ten Pao Group Holdings has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past nine years, but the conservative payout ratio makes the current dividend look sustainable. Ten Pao Group Holdings looks solid on this analysis overall, and we'd definitely consider investigating it more closely.

While it's tempting to invest in Ten Pao Group Holdings for the dividends alone, you should always be mindful of the risks involved. In terms of investment risks, we've identified 1 warning sign with Ten Pao Group Holdings and understanding them should be part of your investment process.

If you're in the market for strong dividend payers, we recommend checking our selection of top 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.