Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Micro-Tech (Nanjing) Co.,Ltd (SHSE:688029) is about to trade ex-dividend in the next three 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. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. This means that investors who purchase Micro-Tech (Nanjing)Ltd's shares on or after the 11th of October will not receive the dividend, which will be paid on the 11th of October.

The company's upcoming dividend is CN¥0.50 a share, following on from the last 12 months, when the company distributed a total of CN¥1.00 per share to shareholders. Looking at the last 12 months of distributions, Micro-Tech (Nanjing)Ltd has a trailing yield of approximately 1.3% on its current stock price of CN¥76.60. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. 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. Micro-Tech (Nanjing)Ltd paid out more than half (53%) of its earnings last year, which is a regular payout ratio for most companies. 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. Over the last year it paid out 64% 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?

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. For this reason, we're glad to see Micro-Tech (Nanjing)Ltd's earnings per share have risen 16% per annum over the last five years. Micro-Tech (Nanjing)Ltd is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. This is a reasonable combination that could hint at some further dividend increases in the future.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Micro-Tech (Nanjing)Ltd has delivered an average of 7.0% per year annual increase in its dividend, based on the past five years of dividend payments. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

The Bottom Line

Should investors buy Micro-Tech (Nanjing)Ltd for the upcoming dividend? Higher earnings per share generally lead to higher dividends from dividend-paying stocks over the long run. That's why we're glad to see Micro-Tech (Nanjing)Ltd's earnings per share growing, although as we saw, the company is paying out more than half of its earnings and cashflow - 53% and 64% respectively. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

In light of that, while Micro-Tech (Nanjing)Ltd has an appealing dividend, it's worth knowing the risks involved with this stock. To help with this, we've discovered 1 warning sign for Micro-Tech (Nanjing)Ltd that you should be aware of before investing in their 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.