Readers hoping to buy Huarong Chemical Co., Ltd. (SZSE:301256) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. 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. Thus, you can purchase Huarong Chemical's shares before the 24th of October in order to receive the dividend, which the company will pay on the 24th of October.

The company's next dividend payment will be CN¥0.05 per share. Last year, in total, the company distributed CN¥0.10 to shareholders. Calculating the last year's worth of payments shows that Huarong Chemical has a trailing yield of 1.2% on the current share price of CN¥8.55. If you buy this business for its dividend, you should have an idea of whether Huarong Chemical's dividend is reliable and sustainable. As a result, readers should always check whether Huarong Chemical 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. Huarong Chemical paid out 115% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether Huarong Chemical generated enough free cash flow to afford its dividend. Over the past year it paid out 182% of its free cash flow as dividends, which is uncomfortably high. It's hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we'd wonder how the company justifies this payout level.

Huarong Chemical does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Cash is slightly more important than profit from a dividend perspective, but given Huarong Chemical's payouts were not well covered by either earnings or cash flow, we would be concerned about the sustainability of this dividend.

Click here to see how much of its profit Huarong Chemical paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. It's not encouraging to see that Huarong Chemical's earnings are effectively flat over the past five years. We'd take that over an earnings decline any day, but in the long run, the best dividend stocks all grow their earnings per share.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past two years, Huarong Chemical has increased its dividend at approximately 41% a year on average.

To Sum It Up

From a dividend perspective, should investors buy or avoid Huarong Chemical? Not only are earnings per share flat, but Huarong Chemical is paying out an uncomfortably high percentage of both its earnings and cashflow to shareholders as dividends. Bottom line: Huarong Chemical has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Huarong Chemical. In terms of investment risks, we've identified 2 warning signs with Huarong Chemical 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.