Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see China Resources Sanjiu Medical & Pharmaceutical Co., Ltd. (SZSE:000999) 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. Accordingly, China Resources Sanjiu Medical & Pharmaceutical investors that purchase the stock on or after the 29th of November will not receive the dividend, which will be paid on the 29th of November.

The company's next dividend payment will be CN¥1.00 per share. Last year, in total, the company distributed CN¥1.15 to shareholders. Based on the last year's worth of payments, China Resources Sanjiu Medical & Pharmaceutical has a trailing yield of 2.5% on the current stock price of CN¥45.61. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. That's why it's good to see China Resources Sanjiu Medical & Pharmaceutical paying out a modest 43% of its earnings. A useful secondary check can be to evaluate whether China Resources Sanjiu Medical & Pharmaceutical generated enough free cash flow to afford its dividend. It distributed 43% of its free cash flow as dividends, a comfortable payout level for most companies.

It's positive to see that China Resources Sanjiu Medical & Pharmaceutical'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 the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, China Resources Sanjiu Medical & Pharmaceutical's earnings per share have been growing at 19% a year for the past five years. Earnings per share have been growing rapidly and the company is retaining a majority of its earnings within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last 10 years, China Resources Sanjiu Medical & Pharmaceutical has lifted its dividend by approximately 19% a year on average. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

The Bottom Line

Is China Resources Sanjiu Medical & Pharmaceutical worth buying for its dividend? China Resources Sanjiu Medical & Pharmaceutical has grown its earnings per share while simultaneously reinvesting in the business. Unfortunately it's cut the dividend at least once in the past 10 years, but the conservative payout ratio makes the current dividend look sustainable. Overall we think this is an attractive combination and worthy of further research.

In light of that, while China Resources Sanjiu Medical & Pharmaceutical has an appealing dividend, it's worth knowing the risks involved with this stock. Our analysis shows 1 warning sign for China Resources Sanjiu Medical & Pharmaceutical and you should be aware of it before buying any shares.

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.