Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Nanyang Holdings Limited (HKG:212) is about to trade ex-dividend in the next 3 days. 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 an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. In other words, investors can purchase Nanyang Holdings' shares before the 26th of May in order to be eligible for the dividend, which will be paid on the 13th of June.

The company's next dividend payment will be HK$1.40 per share. Last year, in total, the company distributed HK$1.40 to shareholders. Based on the last year's worth of payments, Nanyang Holdings stock has a trailing yield of around 3.6% on the current share price of HK$39. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether Nanyang Holdings has been able to grow its dividends, or if the dividend might be cut.

View our latest analysis for Nanyang Holdings

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. Nanyang Holdings is paying out just 13% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. A useful secondary check can be to evaluate whether Nanyang Holdings generated enough free cash flow to afford its dividend. Over the last year, it paid out dividends equivalent to 224% of what it generated in free cash flow, a disturbingly high percentage. It's pretty hard to pay out more than you earn, so we wonder how Nanyang Holdings intends to continue funding this dividend, or if it could be forced to cut the payment.

Nanyang Holdings 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.

While Nanyang Holdings's dividends were covered by the company's reported profits, cash is somewhat more important, so it's not great to see that the company didn't generate enough cash to pay its dividend. Were this to happen repeatedly, this would be a risk to Nanyang Holdings's ability to maintain its dividend.

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

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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. This is why it's a relief to see Nanyang Holdings earnings per share are up 9.5% per annum over the last five years. Earnings have been growing at a steady rate, but we're concerned dividend payments consumed most of the company's cash flow over the past year.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Nanyang Holdings has delivered an average of 11% per year annual increase in its dividend, based on the past 10 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.

To Sum It Up

From a dividend perspective, should investors buy or avoid Nanyang Holdings? Nanyang Holdings delivered reasonable earnings per share growth in recent times, and paid out less than half its profits and 224% of its cash flow over the last year, which is a mediocre outcome. In summary, while it has some positive characteristics, we're not inclined to race out and buy Nanyang Holdings today.

If you want to look further into Nanyang Holdings, it's worth knowing the risks this business faces. Our analysis shows 3 warning signs for Nanyang Holdings that we strongly recommend you have a look at before investing in the company.

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.