Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Anhui Sierte Fertilizer industry LTD. ,company (SZSE:002538) is about to trade ex-dividend in the next 4 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible 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. Thus, you can purchase Anhui Sierte Fertilizer industry company's shares before the 8th of October in order to receive the dividend, which the company will pay on the 8th of October.

The company's next dividend payment will be CN¥0.12 per share. Last year, in total, the company distributed CN¥0.12 to shareholders. Based on the last year's worth of payments, Anhui Sierte Fertilizer industry company stock has a trailing yield of around 4.2% on the current share price of CN¥5.65. 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 check whether the dividend payments are covered, and if earnings are growing.

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Anhui Sierte Fertilizer industry company distributed an unsustainably high 147% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Fortunately, it paid out only 38% of its free cash flow in the past year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Anhui Sierte Fertilizer industry company fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

Click here to see how much of its profit Anhui Sierte Fertilizer industry company paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by Anhui Sierte Fertilizer industry company's 17% 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. Anhui Sierte Fertilizer industry company has delivered an average of 17% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Anhui Sierte Fertilizer industry company is already paying out 147% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

Final Takeaway

Should investors buy Anhui Sierte Fertilizer industry company for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 147% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: Anhui Sierte Fertilizer industry company has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Although, if you're still interested in Anhui Sierte Fertilizer industry company and want to know more, you'll find it very useful to know what risks this stock faces. For example, we've found 3 warning signs for Anhui Sierte Fertilizer industry company (1 is a bit unpleasant!) that deserve your attention before investing in the 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.